British Pound vs. Euro Outlook: New Targets post-BoE
- Pound Sterling could attempt run on top end of recent range at around 1.15 GBP/EUR
- But Soc Gen warn ultimately the Pound will break below 1.10 against Euro longer-term
- Pound-to-Euro exchange rate today: 1 GBP = 1.1398 EUR, EUR/GBP = 0.8773
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Foreign exchange strategists give their views on the next potential steps for the British Pound against the Euro in the wake of June's Bank of England policy event.
Pound Sterling has advanced on the Dollar, Euro and an host of other currencies following a more hawkish-than-expected Bank of England June policy decision which showed the Monetary Policy Committee voted 6-3 to keep rates unchanged, against calls for a 7-2 vote.
The MPC say they are looking through recent economic softness as temporary and markets now reckon an August interest rate hike is more likely following the decision and communications.
Sterling has obliged the Bank and gone higher in line with the rising expectations for that August interest rate rise. The move was consistent with the forecasts laid out by a number of currency strategists we follow, and we are keen to hear where they see the Pound-to-Euro exchange rate going from here.
Initial feedback from the analyst community suggests that gains will likely be limited to recent levels; this does however present those with imminent GBP into EUR payments a shot at some of the best levels seen in weeks.
"This has introduced a bid into GBP, though we think that tone will resonate more against the EUR than in cable. This is simply because we expect the EUR leg to remain heavy as a positioning adjustment continues to ensue following the dovish ECB," says Mazen Issa, Senior FX Strategist with TD Securities.
"We look for the range lows near 0.8680 in EUR/GBP to provide support," says Issa, referencing a potential resistance target of 1.1520 in GBP/EUR. However, the analyst says he is cautious in extrapolating too much of a directional impulse out of this story as "the short Sterling curve's adjustment looks appropriate."
Stephen Gallo, a strategist with BMO Capital Markets also believes the most profitable moves for Sterling are likely to come against the Euro and is loathe to read too much upside into GBP/USD owing to the pervasive strength of the Greenback at present.
BMO's Gallo was one of those analysts who got it right in calling the relatively hawkish set of MPC minutes, he said the outcome would likely trigger a move higher in GBP/EUR and he liked the idea of playing the 0.87/0.88 range in EUR/GBP as a result.
The EUR/GBP range of 0.87/0.88 gives a range of ~1.15/1.1360 in GBP/EUR terms.
Therefore, this implies the Pound might be en route back to the top of the range it has enjoyed against the Euro for a few months now.
"Our view has been to look to buy EUR/GBP on dips towards 0.8700 and to sell rallies towards 0.8850, and this outlook does little to change our thinking," says Shahab Jalinoos, a foreign exchange strategist with Credit Suisse in Zurich.
EUR/GBP at 0.87 gives us a Pound-to-Euro exchange rate at 1.15 and 0.8850 gives 1.13 - therefore the Credit Suisse team are also clearly quite happy to play the range in this apparently increasingly dependable currency pair.
"Whilst it is too early to call this a turning point in GBP, any further improvement in data in coming weeks could provide further impetus to the Pound," says Kamal Sharma at Bank of America Merrill Lynch. "We would focus on EUR/GBP as the most obvious cross to express some policy divergence."
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Longer-Term Might Just Favour the Euro
Of course, complacency can result in pain, and we are told by one noted analyst that a break out of the range we have become accustomed to in GBP/EUR will ultimately occur, but in a direction that favours the Euro.
Analyst Kit Juckes at Société Générale notes the British Pound has largely failed to benefit as much as had seemed possible on the back of the Euro’s political woes and the longer-term picture isn't rosy.
"Unable to benefit from euro weakness and facing a lengthy period of slower growth, we think we will see EUR/GBP break into a higher range around 0.90-0.94 once the euro’s fortunes revive," says Juckes in a mid-year currency briefing.
An higher range of 0.90-0.94 in EUR/GBP gives us a range of 1.11-1.0638 in GBP/EUR terms which would represent a notable loss of buying power for those holding Sterling and looking to make purchases in Euros.
Three Reasons why this was a Bullish, pro-Sterling Meeting
1) The vote to maintain the bank rate at 0.50% was 6-3, with Andy Haldane joining Ian McCafferty and Michael Saunders in voting for a 25bp hike. Markets had expected the vote to be 7-2. "Often, an additional member voting for a hike has preceded a hike at the next Inflation Report meeting," says Daniel Vernazza, Chief UK & Senior Global Economist at UniCredit Bank in London.
2) Economists note the MPC minutes sought to downplay any weakness in the recent run of mixed data, whereas at previous meetings there has been an emphasis on any weak data points.
The Committee said domestically the data was “broadly consistent” with its May Inflation Report projections and that the weakness in 1Q18 “would prove temporary”.
It said indicators of consumer spending had rebounded and employment growth remained strong.
3) The MPC decided that now was the time to revise its guidance on the level of the bank rate at which the MPC would consider reducing the stock of QE, down to 1.5% from 2% previously. "While the MPC may argue that this is a technical clarification, the fact that they have actively discussed balance sheet reduction is itself a hawkish signal," says Vernazza.
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