Barclays and Lloyds Update GBP/EUR Exchange Rate Forecast Targets for 2017-2018

Foreign exchange analysts at two of the UK's most well-known high-street financial services providers have updated clients with where they see Pound Sterling trading against the Euro over the course of the remainder of 2017 and through 2018.

Analysts at Lloyds Bank have downgraded their official forecast for the British Pound to Euro exchange rate saying Sterling is likely to remain pressure by political uncertainty, while at the same time the Eurozone sees its political fortunes stabilise.

Barclays meanwhile also see political uncertainty weighing, with uncertainty surrounding Brexit making it hard for both high-street lenders to be bullish on the prospects facing Sterling. But GBP/EUR targets at Barclays are set a little higher than that at their competitor.

Euro Gets an Upgrade

The decision by Lloyds to downgrade the GBP/EUR target in their mid-year International Financial Outlook report is however largely a result of a broader upgrade in their expectations for the Euro.

The Eurozone economy has expanded continuously for nearly four years and the recovery has broadened; no wonder Lloyds join a number of other analysts in expecting a better performance by the Euro in the future amidst expectations that the European Central Bank will have to respond to the growth by raising interest rates.

The bullish update to the Euro’s targets comes as Eurozone Q1 GDP growth was revised up to 0.6%q/q, while major surveys signal a continued robust pace of growth in Q2.

There are however risks to theis pro-Euro view.

Enthusiasm towards the single currency is tempered by the observation that annual inflation for May dropped to 1.4%y/y from 1.9%y/y, while the core measure (excluding food and energy) fell back to 0.9%y/y from 1.2%y/y.

“Despite stronger economic activity, remaining spare capacity in the economy continues to hold down domestic inflation pressures,” say Lloyds.

The ability of the Euro to keep rallying will rely on the ability of inflation to rise to the ECB's target of 2% as  such an outcome would secure a EUR-positive interest rate rise at the ECB.

We have also reported that some analysts believe the ECB’s latest inflation forecasts are too optimistic; if it is true that inflation will fall faster-than-expected then the Euro will likely see its ability to advance capped.

The ECB left interest rates and its €60bn a month asset purchase programme unchanged at its June meeting, but its assessment of the economic growth outlook was raised to “broadly balanced”, compared with “tilted to the downside” previously.

Moreover, the ECB removed its easing bias in its forward guidance on interest rates.

President Draghi nevertheless reiterated that, with underlying inflation remaining subdued, it is too early to contemplate withdrawing policy stimulus.

Furthemore, “the pair is likely to be heavily influenced by the progress of Brexit negotiations, which introduce a high degree of uncertainty around our base case forecast,” say Lloyds.

The British Side of the Coin: Not Good, but Not Terrible for Sterling

Latest UK economic indicators reaffirm headwinds facing the consumer.

Regular wage growth, excluding bonuses, fell to 1.7%y/y in the three months to April, while CPI inflation increased to a near four-year high of 2.9%y/y in May. The outlook for real wage growth has continued to deteriorate.

Retail sales fell by 1.2%m/m in May, suggesting that the underlying trend for overall spending growth slowed sharply in the first half of the year.

However, latest survey data suggests the second-quarter will show an improved performance in the economy. CBI Industrial Trends Survey data has hit its highest reading since 1988 in June in a sign that activity in this sector is starting to accelarate.

The Bank of England meanwhile left policy unchanged, as expected, but the big surprise was that two other MPC members, McCafferty and Saunders, joined Forbes (in her last meeting) in voting for an immediate rate rise. Hence, it was a relatively slender 5-3 vote in favour of keeping Bank rate at 0.25%.

This helped to lift the Pound and gilt yields off the month’s lows, with the OIS curve fully pricing a quarter-point rate rise by early 2019.

Further support comes from the words of Bank of England Chief Economist Andy Haldane who has surprised many observers by stating the time to raise interest rates by 0.25% is fast-approaching.

Lloyds Forecast for the Pound v Euro

In all, the ongoing developments at the Bank are marginally positive for Sterling and this should reinforce the floor in GBP/EUR.

The GBP/EUR is now forecast by Lloyds to end 2017 at 1.14, a target that is fixed for the duration of 2018:

“Our Euro forecast for this year has been nudged higher, with EUR/USD now at 1.14 (up from 1.12) at end-2017, but left unchanged at 1.18 at end-2018.

“We have left our forecast for the Pound against the US Dollar unchanged at 1.30 for end-2017 and marginally lower at 1.34 at end-2018.

"Our GBP/EUR projection is lower at 1.14 (from 1.16) at end-2017 and unchanged at 1.14 at end-2018,” say Lloyds.

Barclays Set Target a Little Higher

Analysts at Barclays are also concerned about the weight posed by political uncertainty.

"The outcome of the UK general election has created challenges for Brexit negotiations and risks of no deal now look significantly higher," says Marvin Barth at Barclays in a note dated June 22.

Barclays expect the maximum uncertainty to bite in the coming quarters, with EURGBP ending the year at 0.85. This is equates into a Pound to Euro exchange rate of 1.1675.

"From there, reduction in prevailing undervaluation and increased clarity around the negotiations support GBP appreciation, bringing EURGBP to 0.83 in Q2 18," says Barth.

This is a GBP/EUR exchange rate of 1.2048.

Short-Term Technical Picture Suggests a Floor has Been Found

The Pound to Euro exchange rate (GBP/EUR) has reached the bottom of a range between 1.13 and 1.20 within which it has been trading all year suggest our latest technical studies.

Whilst it is expected to find it difficult to break below the floor there are few signs of price action reversing yet.

Technical studies rely on previous price action to ascertain the structure of the market as this gives great clues as to potential future behaviour.

The mini-downtrend from the 1.20 April highs is still intact and therefore capable of breaking lower, and entering the fresh pastures below 1.13.

And whilst it may seem unlikely, a break below 1.1275 would probably confirm a breakout from the range and a move lower to an initial target at 1.1200.

The MACD is not signalling further downside, however, and the little pattern it has formed at the cycle lows (circled) is a bullish reversal pattern on an indicator, suggesting a reversal of that indicator, and therefore the actual exchange rate too.

We would want to see a break above the trendline of the mini-down-move for greater confirmation of a reversal of the trend, however.

Given the trendline remains intact it is too early to speculate about such a reversal.

“Recent price action suggest the euro rally has become tired and thus the upside should be limited,” says Piet Lammens at KBC Markets. “Following a steep rise since mid-May, EUR/GBP looks ready for a pause or even a correction.

But Lammens says such an outcome might only offer the Pound temporary respite. “A technical relevant break lower is needed for us to become more Sterling-optimistic.”

KBC Markets look to buy the Euro on any dips against the British Pound.