Crédit Agricole: GBP/EUR Exchange Rate will Continue to Grind Out Current Range for at Least Another Year

• Pound to Euro Exchange Rate Today: 1.1704
• Euro to Pound Sterling Exchange Rate Today: 1.2480

Pound Sterling is likely to remain caught around current levels against the Euro for some months warn analysts at a leading European investment bank.

The news will come as a disappointment to those hoping for a stronger British Pound which remains in touching distance of long-term lows against both the Dollar and Euro.

The foreign exchange analysis team at Crédit Agricole have written to clients saying that while Sterling is indeed undervalued, it is not necessarily ready to recover.

“A lot of negatives seem to be in GBP price, but the currency is not yet a buy,” reads a note to clients issued by Crédit Agricole on April 4.

The call comes at a time of relative stability for the British Pound strip with some analysts suggesting that the UK currency has turned a corner and put the majority of its Brexit-related declines behind it.

Indeed, there is the argument being made that from here the nature of Brexit will become clear which offers businesses the opportunity and ability to begin making investment decisions once more.

But there are more surprises on the Brexit journey that markets are underappreaciating argue Crédit Agricole.

“The outlook for the GBP continues to be driven by a tug of war between excessive FX undervaluation and a gradual deterioration of UK fundamentals,” says Valentin Marinov, Head of G10 FX Research at Crédit Agricole.

Over the longer term, Marinov sees a slightly greater underperformance of GBP vs EUR, given the growing risks of a ‘very hard Brexit’ and generally better economic conditions in the Eurozone.

This view does have other prominent backers in the analyst community though. We have recently reported that analyst Kamal Sharma at Bank of America Merrill Lynch Global Research is anticipating one more dip for the Pound ahead of a sustained recovery from undervalued levels.

Sharma says rhe risks for GBP remain high and they disagree with some observers that believe the triggering of A50 has somehow removed the veil of uncertainty.

“We disagree with this narrative and would indeed argue that the uncertainty has only just begun,” says Sharma in a recent note to clients.

Euro Expected to Perform Well

While Sterling is expected to remain under pressure over coming months, and even years, Crédit Agricole reckon that the outlook for the Euro is just the opposite.

“EUR remains well below its fundamental fair value and we still project gradual EUR/USD appreciation in 2018 on the back of tapering of the European Central Bank's quantitative easing programme and unwinding of EUR-funded carry trades,” says Marinov.

Analysts cite an ongoing improvement in Eurozone economic fundamentals, which should allow the ECB to announce the withdrawal of quantitative easing, potentially as soon as September.

We do note however that expectations that the ECB will start tapering in September has been brought into question of late with reports that the ECB is unhappy with the markets reaction to the message delivered at their March meeting.

There is a distinct chance that the ECB could delay tapering in order to target lower Eurozone bond yields in order to keep financing low and the economy growing.

It also helps that delaying tapering will also keep Euro valuations under pressure ensuring Eurozone exports remain attractive on the global market place.

So this is one area the assumptions made by Crédit Agricole could be tested.

Crédit Agricole are also wary of the persistent Eurozone political risks that lie ahead: Europe has French, German and Italian elections in Q217 and Q317 and Q118.

This is expected to keep investors cautious on the single currency’s outlook.

Nevertheless there is the sense that political-based fears are subsiding.  

“We revise up our EUR/USD profile for 2017, to account for the better chance that a mainstream party will win the French presidential election and the improved Eurozone economic outlook,” says Marinov.

Forecasts for the Pound vs Euro Exchange Rate: More of the Same

With a higher EUR/USD profile comes a higher EUR/GBP profile. 

The EUR/GBP exchange rate is forecast to be at 0.85 by mid-2017 ahead of a rise to 0.86 by the end of September and 0.87 by the end of 2017.

By the end of March 2018 the exchange rate is forecast to remain around 0.87.

From a GBP into EUR perspective this equates to 1.1764, 1.1627 and 1.1494.

We find it interesting that the forecast levels are pretty much in line with what we have seen so far in 2017 which suggests this the Pound is going to be stuck within a familiar range for the next year.

At the time of writing Sterling has found a fresh tailwind thanks to data showing the fastest growth in three months for a sector of the U.K. economy that matters most.

"Services growth unexpectedly accelerated in March which for now helped to allay worries of Brexit putting a brake on the economy. Upside for the pound could prove limited ahead of more big ticket U.K. numbers in the days ahead on trade, due Friday, and next week when inflation and unemployment print on Tuesday and Wednesday, respectively," says Joe Manimbo, an analyst with Western Union.