Handelsbanken See 'Good Chance' Euro to Pound Sterling Exchange Rate Falls Over Coming Months

Brexit has made the Euro arguably more vulnerable than it has ever been, suggests Handelsbanken’s Pierre Carlsson in a recent research note to clients.

• Euro to pound sterling exchange rate today = 0.8282
• Pound to euro exchange rate today = 1.2072

The euro has further to fall as the fallout from the UK's exit from the Eurozone is yet be fully digested by the shared currency argue Carlsson and his team.

“We believe there are good reasons to expect the market to start focusing more and more on the ramifications for the eurozone, moving a lot of the pressure over to the euro.”

Carlsson’s view is reflected in his non-conformist forecast for the EUR/GBP pair, which he sees as currently peaking at 0.83, before pulling back to 0.82 in one month, and then following a further lengthy consolidation, declining to 0.78 by the end of 2016.

In a nutshell, as far as Carlsson is concerned the euro is damned whichever way Brexit plays out.

This is because, according to his analysis, a clear cut divorce will weaken the euro as it will lead to copycat calls for referenda from other vacillating members.

But likewise, if by miracle Brexit does not come into effect -  a not as unlikely scenario as it might seem -  the pound would strengthen in a relief rally versus the euro.

“We believe that when (if?) Brexit becomes a reality, the euro will suffer. If by some miracle, it is at all possible for the UK to readdress the decision, the pound would strengthen considerably. So although we think that the pound will continue to be weak, we see good chances of a lower EURGBP in the coming months,” he says.

Latest Pound/Euro Exchange Rates

	Live: 1.1391▼ -0.13% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1004 - 1.1049
**Independent Specialist	1.1232 - 1.1277 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Could Brexit really be reversed?

One way in which a Brexit could be avoided might be if a more Euro-sympathetic candidate such as Teresa May won the Conservative party leadership.

It would not be unusual for her to call a general election on winning the leadership contest to endorse her mandate.

Such an election might provide an alternative to Brexit which she would be unlikely to endorse herself given her Remain leanings.

This might lead to the election of a new more pro-Remain government and watered down form of membership.

Another Eurozone banking crisis?   

Handelsbanken’s Carlsson does not just see problems for the euro and the EU coming from a political source but also from a financial one too.

In the aftermath of Brexit last Thursday, banking shares were some of the worst hit.

Italian banks were particularly badly hit causing Italian Prime Minister Mateo Renzi to request that the EU make an exception for the Italian government to recapitalise its banks:

“Italian prime minister, Renzi, is taking this opportunity to call for an exception for Italy to be able to have the government recapitalise its banks. The plunging prices of European banks, not least the Italian banks, has meant that the average price-to-book values are down to extremely low levels making it impossible to imagine any other way for them to sort out their capital needs.”

Unfortunately, bank’s lower price-to-book value risks threatening credit transmission to the real economy as illustrated in the graph below which Carlsson uses to illustrate the close correlation between the two.

It is precisely the lack of availability of credit to organisations, which has hampered the recovery in the Eurozone do date, so another bout of tightening is the last thing the Eurozone needs. As Carlsson puts it:

“It also means that the room for new or renewed corporate lending is wiped out and all of ECB’s efforts of to boost lending are nullified. Instead, a possible recession will mean new credit losses, risking some of the banks’ existence.”

Indeed, according to analysts at Citi,Draghi himself has already raised the issue of eurozone banking vulnerabilities:

"EUR appears to be finding better support via the euro zone’s EUR30bn current account surplus and flows out of sterling but faces headwinds from ECB President Draghi’s warning overnight that if the UK goes into recession, the effects would be immediate on the euro zone and that banking vulnerabilities loom large and need to be addressed now."

This then is the worst case scenario – a fresh banking crisis in the Eurozone, triggered by the UK leaving the club.

If that were the consequence of Brexit, it would, as one analyst so vividly put it, really be like, “The ‘butterfly effect’ on steroids.”