Forecast Targets for GBP/EUR Rate Cut Despite Super Thursday Bounce

• British Pound to Euro Rate Today: 1.1534
• Euro to Pound Sterling Rate Today: 0.8671

The Pound has fallen back against the Euro on Wednesday January 18 as some of the impressive gains realised over the course of the previous 24 hours are reversed.

Pound Sterling was sent sharply higher after Prime Minster May delivered the Government’s objectives on Brexit and in doing so setting aside months of uncertainty.

Markets hate uncertainty, and with some certainty the Pound was able to stretch its legs.

"May’s speech provided clarity where there was uncertainty, and if there is anything markets hate, it is uncertainty," says Joshua Mahony at IG. "With everything now out in the open, there is a good chance we will see the Pound start to recover from here on out."

However, as markets have now been afforded some time to consider recent events, we see the currency is retracing.

Despite the declines, to analysts at Nordea Markets, this is the start of a recovery.

The bank believe the Pound is heading higher from here, however, not as high as they had initially assumed.

In a note to clients Chief Analyst Johnny Bo Jakobsen says he is cutting his initial targets in response to the Government’s desire to seek a hard-Brexit.

“The UK government is prepared to accept a hard Brexit. Until now, however, our baseline for the UK economy has been based on the assumption of a soft Brexit, assuming that the UK would eventually end up with a deal which would ensure continued access to the EU internal market including services. But this assumption seems too optimistic at this juncture,” says Jakobsen.

Tuesday’s long-awaited speech by Prime Minister Theresa May made it clear that the UK is set to pull out of the EU’s single market and the customs union in order to regain control of immigration and end the jurisdiction of the European Court of Justice.

While May said she aimed for the freest possible trade in goods and services with the EU, she added that “what I am proposing cannot mean membership of the single market.”

For Jakobsen, being out of the single market means the outlook for the UK economy remains clouded and it will take a long time before the road ahead becomes more certain.

Forecasts Cut by Nordea Markets

Noredea have adjusted their GBP forecasts somewhat to account for the fact that we no longer expect a soft, but rather a hard version of Brexit, which the market has already somewhat priced in.

"The uncertainty in the near term will remain high. Since the GBP has been already hit a lot and is already broadly undervalued, we expect it recover in the near term," says Jakobsen.

The BoE will also play a big role, as rising inflation makes them not willing to ease further – rather, warn of being “neutral” for now.

"That said, we retain a mildly stronger GBP in our forecast, which also reflects big political uncertainties in the US and Euro area," says Jakobsen.

In three months the Pound to Euro exchange rate is forecast at 1.1904, down from a previous forecast of 1.2048.

The June 2017 forecast is cut to 1.2048 from 1.2195 previously.

The December 2017 forecast is cut to 1.2048 from 1.2195.

From a Euro into Pound angle this represents a lift from 0.83 in three months to 0.84.

From 0.82 in June to 0.83.