Target a Rise in Euro to Pound Sterling Rate to 0.90 say UniCredit Strategists
Strategists at Unicredit have adjusted a long-term bet on the EUR/GBP exchange rate in anticipation of yet more gains.
~ British Pound to Euro exchange rate today (6-10-16): 1.1351
~ Euro to Pound Sterling exchange rate today: 0.8810
Back on July 4th 2016 currency strategists Unicredit made a trading recommendation to buy EUR/GBP and sell GBP/USD.
The call was based on the expectation that there was further Brexit-induced weakness ahead.
Although they closed their GBP/USD position owing to a strengthening in the exchange rate at the time, they kept their EUR/GBP position open and it appears the trade is paying dividends.
The decision to run with the bet against Sterling using Euros was, “based on our conviction that material downside existed in sterling on the back of widespread uncertainty due to the Brexit referendum result,” explain analysts in a research note released at the time.
As a result of holding their EUR/GBP buy-position, they have seen a 2.1% profit accrue.
Since the beginning of September, the pair has seen even more upside, rising by over 5.0% to a year high at 0.8756, and Unicredit now think it would be prudent to lift their stop-loss to 0.8562.
A stop-loss is an order set at a certain market level which automatically closes a trading position if it is triggered - that is if the market price reaches it.
In essence, this is a forecast for yet further Euro strength against the Pound.
“We think it is prudent to trail our stop-loss to below 0.8562 (previously below 0.8150), effectively locking in a 1% profit, and to extend our target to 0.93 (from 0.89 previously),” say Unicredit.
Unicredit cite Theresa May’s speech at the Conservative Party conference at the weekend as a major reason for extending their target, as it did not provide any confidence that she would prioritise staying in the Common Market during negotiations.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
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| 1.1004 - 1.1049 |
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For financial markets, this is a critical consideration and by not prioritising remaining in the trading club, the outlook for the economy has become riskier.
Fears of how a ‘Hard Brexit’ could impact on the City of London, in particular, are weighing on the pound.
“The fact that the financial industry will not be a priority in terms of negotiations surprised the market and leaves the pound very much under pressure, with GBPUSD today breaking recent lows around 1.2800,” said Lloyds in a recent note on the subject.
Unicredit see the risk of the UK coming out of both the EU and Common Market, as not sufficiently ‘priced in’ by markets, and so, therefore, likely to lead to further weakness for Sterling.
“In effect, this makes a “hard Brexit” scenario more likely than previously thought, something we believe the market is not pricing in, sufficiently. We expect sterling to weaken further against the EUR over the coming weeks and months.”
Parity Unlikely, But Further Weakness is Likely
We have heard some talk about the EUR/GBP exchange rate potentially reaching parity in light of the extended sell-off being witnessed.
"Now that key support levels have been broken, many are wondering if the British pound will hit parity versus the U.S. dollar and/or euro," says Kathy Lien, Director at BK Asset Management in New York.
"In the past 45 years, sterling has NEVER traded at parity with the euro or dollar - not after the ERM crisis in Britain when the Soros broke the Bank of England and certainly not after the euro was launched and it sank to a record low of 0.8440," says Lien.
Lien believes the while the UK economy should suffer drag from Euro it should ultimately stay afloat, helped not least by the sharply weaker Pound.
As such, she shares UniCredit's EUR/GBP target for 0.90:
"While we expect GBP/USD to reach 1.25 easily, a move down to parity may be a bit too ambitious for sterling bears. Technically, the currency pair is deeply oversold with support coming in at 1.25. For GBP/USD, the 2012 high of 0.8815 could provide some resistance but the next major level is 90 cents."
Euro to Remain Strong
Given the current relatively positive outlook for the Euro the forecast appears reasonable.
Even banking woes are not enough to dissuade analysts of the Euro’s potential.
Analysts at Morgan Stanley, for example, go completely against the grain in seeing the single currency rising rather than falling as a result of the Deutsche Bank (DB) crisis.
“We think that worries about the European banking sector are actually a bullish sign for the currency (the Euro) as it may lead to banks selling off foreign assets and bringing the money back home,” said Morgan Stanley in their note.
The DB crisis also puts a cap on ECB stimulus since any move to lower rates will make it even harder for Eurozone banks to turn a profit, as it constrains how much interest they can charge customers.
An analysis of differing bond yields also suggests the euro is likely to go sideways or even higher.
Societe Generale see even more potential upside for the Euro versus the Pound and the Yen, from a pure yield comparison point of view, since both these currencies are unlikely to see higher yields.
Generally, FX flows go to the higher yielding side of a pairing as foreign investors tend to prefer currencies which offer them higher returns.
“Maybe we’re just in for a long period of going sideways. But I have two more sources of concern, which may argue for Euro longs, against GBP now and against the yen before long,” said the French lender in a recent note.
