2015 Sees GBP/EUR Forecast Higher as Full-Scale QE Announced

The euro exchange rate complex (EUR) is forecast to come under pressure against the British pound and US dollar through 2015 as the ECB introduces full-scale quantitative easing say analysts at Barclays and Bank of America Merrill Lynch.

One of the currencies best positioned to take advantage of the euro's woes is the pound sterling - the Bank of England is tipped to raise rates by mid-2015 at latest.

This view comes despite a softer UK economic outlook which has seen the GBP weaken at the start of the year.

The diverging directions in policy will drive a wedge between the GBP and EUR - to the benefit of the GBP.

What does the pound to euro exchange rate's progress look like at the current time?

As the below GBP/EUR graph shows the longer-term uptrend remains intact - the mantra of following the trend therefore remains our preferred stance on this pair.

PS: The exchange rates above and in this article are to be assumed as being taken from the wholesale currency markets. Your bank will subtract a spread at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more FX. Learn more.

Why the Eurozone Needs Help

The risk sentiment towards the EUR remains edged higher this week past as Greek 10-years climb to 9 pct for the first time since October 2013.

"Traders seek exit from peripheral risks and fast, as fading liquidities increase anxiety; Portugal (+50 bp), Italian (+35bp) and Spain (+20bp) 10-year yields rise significantly," says a note from Swissquote Bank.  

As fragmentation in the Euro-zone surge, EUR/USD actually rose as traders need more of a hint on full-scale European Central Bank (ECB) Quantitative Easing before really pulling the trigger on the euro sell-off.

This therefore remains the main risk for the euro exchange rate complex in coming weeks.

"Although the short-term bullish momentum strengthens, top seller strategies dominate pre-1.30 as the EUR-negative risks prevail. Markets are very sensitive to QE-related comments as the Euro-zone recovery remains very fragile," say Swissquote.

Indeed, the euro to pound exchange rate's recent rally unwound in spectacular fashion on Thursday as markets were unwilling to bet on further gains by EUR against the GBP.

Two Big Banks Back Full-Scale Quantitative Easing at the ECB

We hear the views of two leading foreign exchange dealing institutions, Barclays and Bank of America Merrill Lynch.

Both banks are positioning for action at the ECB:

• Thomas Harjes at Barclays:

"In normal times, the ECB would only react to variations in the oil price and the exchange rate if they were likely to have long-lasting (second round) effects on inflation.

"But times aren’t normal, the economic outlook remains very weak, inflation too low and the risk of outright deflation is on the rise.

"Even if a lower euro is likely to eventually push up inflation and provide at least a temporary boost to the economy, the ECB can ill afford to wait that long without easing monetary policy further.

"Market-based measures of inflation expectations are increasingly indicating that the ECB is at risk of losing its credibility to return inflation back to the close-to-2% target even over the medium term.

"Additional substantial easing is hard to engineer without large-scale ECB asset purchases and we therefore remain confident that the ECB will announce purchasing of government bonds of euro area member states by early next year at the latest.

• Ruben Segura-Cayuela  at Bank of America Merrill Lynch:

"We have argued before that sovereign QE was a very close call in H1 next year.

"We now see it as unavoidable in our central scenario (hence data dependent) of an economic recovery and an inflation profile that surprise the ECB on the downside, and a package of measures that is unlikely to have any impact on the economy during the next six months, beyond movements in the exchange rate, and absent major development on the regulatory treatment of mezzanine tranches in ABS or a powerful guarantee programme.

"The market seems to share our scepticism, as reflected by the evolution of the 5Y5Y inflation forward, and it is hard to see a meaningful recovery in expectations without more forceful action.

"In a scenario where either inflation surprises on the downside during Q4, TLTRO take up in December is lower than consensus expects, or the economic recovery is weaker, we could even see the ECB pushed into doing more during Q1.

"But in our central scenario, building the political consensus could take more time."

The last statement is important - some euro bears could be disappointed by the timing of the moves.

Therefore, the risks of further climbs in the euro to pound exchange rate remain a risk in the near-term.

Ultimately though, the outlook is pro-GBP.