The Euro to Pound Exchange Rate: Forecasts Downgraded for 2017
Political risks should weigh on the Euro. Beginning in just a few weeks the Eurozone will face several important political events
The political outlook for Europe enters a phase of uncertainty in 2017 and we should see Pound Sterling benefit at the Euros expense say SEB Bank.
Pound Sterling can be dubbed 2016's political currency of choice.
We have seen the trade-weighted exchange rate plummet to its lowest levels since 1990 as markets priced in the potential negative effects of the UK's exit fromt he EU.
However, heading into year-end there is a growing consensus that for now Sterling has priced in enough political negativity, and indeed, could be considered undervalued.
Meanwhile, a combination of increasing risk of fragmentation in Europe brings the possibility of Sterling becoming a ‘safe haven’ in the event of a new Euro-crisis.
This view has led Scandinavian lender SEB to downgrade their forecasts for EUR/GBP.
“Political risks should weigh on the Euro. Beginning in just a few weeks the Eurozone will face several important political events that will include a referendum on a new Italian Constitution, general elections in several countries, including a presidential election in France and a new parliament in Germany, all scheduled for next year,” said SEB’s Richard Falkenhall.
EUR/GBP may fall more rapidly that other pairs in the event of a political crisis in as it will probably see an increase in flows from continental Europe to the UK, if what happened during the Eurozone sovereign debt crisis in 2012 is anything to go by.
“There is certainly a risk that political uncertainty in itself or an unexpected outcome will once again raise the risk premium on the euro and euro-denominated assets causing outflows to more attractive alternatives," says Falkenhall.
But what about the uncertainty posed by Brexit - particularly as Britain is expected to trigger Article 50 by March of 2017.
“Although GBP suffers from political uncertainty regarding the forthcoming Brexit negotiations, it may well be regarded as a more attractive alternative to the euro given the increased risks the single currency could disintegrate altogether," says Falkenhall.
GBP/EUR
Daily Chart Showing live Inter-Bank Rate and Indicative Rates for International Payments.
The SEB analyst also sees the British Pound as having been too aggressively undervalued post-Brexit, and therefore liable to bounce.
The Pound is currently 15% undervalued as a result of the risk associated with Brexit, and this is likely to continue until a deal is agreed.
Falkenhall says the current valuation assumes a “Hard Brexit” in which the UK loses access to the Single Market, however, he argues this is not the most probable outcome and is too pessimistic.
“The combination of higher risk premium on the Euro and a more reasonable premium on GBP could push EUR/GBP substantially lower from today’s level,” concluded the SEB analyst.
SEB forecast EUR/GBP to meandering down 0.70-0.75 longer term.
From a Pound into Euro perspective this equates to a range of 1.4285-1.33.
Decline Hitting Support
From a technical perspective the decline in the Euro is slowing owing to some key support levels being hit.
We would expect this to feed into a more stable EUR/GBP over coming days.
"The decline is hitting a support-level; consequently an interim rebound towards 0.864 is not off the table," says Gottfried Steindl at Raiffeisen Bank International in Vienna.
Though, the long-term pattern looks toppish, hence a drop to about 0.814 is expected to follow afterwards.
Raiffiesen are short on the EUR/GBP targeting 0.814 with a stop-loss set at 0.864
