Barclays Lift Pound-to-Euro Rate Forecasts

UK high-street lender Barclays believe Pound Sterling should appreciate against the Euro by more than they had previously predicted.

2018 has gotten off to a flier for the British Pound; in the group of the world's ten largest freely-traded currencies the Pound is the best performer of 2017. Only Norway's Krone is doing better.

The outperformance comes amidst a mellowing of fears concerning the negative impact Brexit might bring upon the UK economy which is widely forecast to maintain growth above 1.0% over the next two years.

Indeed, with the a transitional period widely expected to be agreed upon in coming months traders are betting that the next two years could see the UK economy outperform expectations and the Bank of England is therefore expected to respond by raising interest rates.

Brexit therefore ultimately remains the crux for Pound Sterling's outlook; steady progress makes for a stronger Pound. The European Council will soon start discussing its negotiating strategy and guidelines on the transition phase in the coming weeks.

"Progress made since the December agreement on withdrawal have lifted GBP to one-year highs, and we believe that the meaningful involvement of Parliament on the final deal brings transparency to the process and reduces the risks of a crash out," says a note from analysts at Barclays who are seeing the worst-case scenario type of Brexit as being increasingly remote.

"As such, we have revised our EURGBP forecast path lower, to reflect the pricing out of the negative tail risk event," say Barclays.

But, there is a note of caution to observe.

"According to our investor survey, a steady orderly progression is considered to be largely priced in already, and investors seem more worried about a stalling in the negotiations, given the presence of an additional participant (ie, the UK Parliament)," say Barclays in a note to clients.

Politics Behind the Pound's Better Outlook

Politics are key to the Pound-to-Euro exchange rate's outlook according to Barclays who eye a number of important pro-Sterling political developments having taken place over recent months:

1) The UK parliament will have more of a say in Brexit proceedings. This will ensure the UK Government inevitably negotiates with the wishes of remain-orientated MPs in mind.

2) The European Union have softened their stance. What is clear to Barclays is that the Europeans want an orderly Brexit, just like those on the UK side. What scared Europeans was the prospect of May's government collapsing when her Northern Irish counterparts in the DUP threatened to withdraw support for May owing to guidelines in Brexit talks pertaining to the Irish border.

"The Europeans immediately made themselves available to the UK government continuously to renegotiate and showed increasing flexibility to get a deal," note Barclays.

Analysts believe the threat of a hard-Brexit - an exit from the EU without a formal deal being in place - is therefore minimised.

"It leads us to lower our EURGBP forecasts for Q1 through Q3 to show steady appreciation of GBP from its significantly undervalued level as the threat of a coach out no longer should deter long-term investment in the UK," says Marvin Barth, an analyst with Barclays based in London.

Nevertheless, the Euro-to-Pound exchange rate is forecast at 0.88 by the end of March 2018, 0.87 by the end of June, 0.86 by the end of September and 0.85 by end-2018.

This gives us respective Pound-to-Euro exchange rates at: 1.14, 1.15, 1.16 and 1.18.

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Regarding the Euro side of the equation, Barclays notes economic growth in the Eurozone remains robust while event risks are low. One potential disruptor is the Italian elections, due to be held in March where EU-sceptic parties might make gains.

However, for now such an outcome is seen as a risk, Barclays don't believe Italy warrants a downgrade to their forecasts for the Euro.

Even were a Euro-sceptic party to come to power, namely in the form of a M5S-led coalition, the Italian constitution prohibits referenda on treaty changes and the coalition would lack the two-thirds majority necessary to make treaty changes.

A 0.8 Surge Takes GBP/EUR to Key Technical Level

Pound Sterling has risen strongly versus the Euro with one Pound going from buying only 1.1324 Euros at the open of Wednesday's trading, to buying 1.1476 at the time of writing just after noon.

This represents a 0.8% rise - a move of this size is rare for this usally conservative currency pair.

The advance has come about partly as a result of better-than-expected UK employment data which showed wages increasing by a higher 2.4% than the 2.3% analysts had predicted.

Higher wages are likely to lead to higher inflation and higher interest rates, which have a market influence on the Pound.

Higher interest rates tend to drive up the Pound as they attract greater flows from foreign investors seeking somewhere profitable to park their money.

The subsequent rally in Sterling has led to a rise up within the range the pair has been in for the last six months, roughly between 1.1100 and 1.1500.

Our week-ahead forecast correctly predicted the rise although the upside target at 1.1500 at the top of the range has yet to be reached.

But, now we are at a key level where we expect the rally to find extra vigour, or capitulate as it has done so many times over recent months.

The top of the range is a 'make or break' level which the exchange rate will struggle to break above because many short-term traders could be anticipating a pull-back and act accordingly by selling the Pound at that level, thus contributing to the downside pressure through their own actions.

A such we would want to see a break above the December 8 highs at 1.1510 for decisive confirmation that the upper border of the consolidation had been breached.

Assuming such a break the pair would be expected to rally up to an initial target at 1.1600 followed by 1.1730, as per our week ahead forecast.

For further details on this forecast, please see here.

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