GBP/EUR Forecasts for 2015 Warns Pound now Overvalued

Image © Pound Sterling Live 2014.

GBP/EUR exchange rate forecasts issued by Barclays, Goldman Sachs, HSBC and Morgan Stanley for 2015 confirm the pound sterling could be over-priced against the euro.

The median prediction from a selection of leading investment bank currency forecasters place the pound to euro exchange rate at 1.3165 by the end of the year.

However, we note the most optimistic forecast resides at 1.4245 and the lowest at 1.1905 confirming a wide variability amongst analysts.

Early 2015 saw the pound to euro exchange rate break above resistance at 1.30 and peak at 1.35 taking the pair above the one month median call by analysts for 1.2795.

Risks to the exchange rate's outlook now lie squarely to the downside on a fundamental basis owing to rich valuations.

Technical analysts meanwhile tell us that the 1.28 and then the 1.25  level will continue to offer strong support points which will provide a floor to any major bouts of euro strength.

Further gains are expected from a technical perspective owing to the strong momentum behind the pair, however the region at 1.35 offers resistance to further advances.

Chart © Pound Sterling Live 2015. Be aware that all our quoted exchange rates are subject to a discretionary spread by your bank, it can differ significantly from the market rate. If you are looking to make international payments we suggest being quoted by an independent provider. By tapping the wholesale markets they can offer up to 5% more currency in some instances. Find out how.

Exchange Rate Forecasts: Is the Pound Overvalued vs the Euro?

The below table tells a story that ultimately reflects the improving fundamental picture in the United Kingdom.

It also suggests near-term risks lie to the downside as the sterling could be richly priced against the euro.

The outperformance of the GBP is based on the assumption that the Bank of England will raise interest rates in response to the economic growth story while analysts tell us the Eurozone will see negative interest rates.

The IMF Eurozone growth is projected to strengthen to 1 percent in 2014 and 1.4 percent in 2015, but the recovery will be uneven.

Growth in the UK is expected to average 2.25 percent in 2014–15.

With this outperformance we expect to see the pound euro exchange rate retain a positive bias.

Morgan Stanley: Eurozone Economy Offers Green Shoots

Not included in the above table are the predictions held at Morgan Stanley who see GBP/EUR at 1.33 in Q1, 1.33 in Q2, 1.32 in Q3 and 1.32 in Q4.

Eurozone strength appears to be the reason they are suggesting sterling-euro is currently over-priced:

"We believe EUR could see something of a correction, as positioning is stretched and data have improved somewhat. Signs of reflation and green shoots in the region should support the currency.

"The main risk for EUR is Greece, where the ECB’s decision to stop accepting Greek government debt as collateral has escalated tensions in the region. While we expect a resolution, this heightens risks for the currency in the near term."

Eurozone Confidence Improves, Supports the Euro’s Outlook Near-Term?

The euro exchange rate has held up relatively well against the pound sterling and US dollar in recent weeks in a sign that the shared currency will not be a push-over.

The reason for this renewed sense of confidence in the euro complex appears to be the notion that all bad news on the Eurozone’s outlook appears to be already factored into the exchange rate.

Chris Williamson, Chief Economist at Markit tells us that funds are flowing back into the Eurozone as sentiment improves:

“Investors have shown greater interest in the Eurozone in recent months, according to ETF fund flow data, in a major change compared to the summer.

“The better than anticipated expansion of the economy in the third quarter goes some way to validate the improved sentiment towards the single currency area, though the still-subdued pace of expansion signalled by October’s PMI readings suggest recent ECB stimulus has yet to make an impression of eurozone growth.”

Growing confidence attracts investor money which in turn bids up the value of the currency involved.

We could well see continued support for the euro in the near term.

Risks to GBP Strength: Bank of England Delays Interest Rate Rise

Sterling suffered a soft finish to 2014 as markets pushed back their expectations for the first interest rate hike at the Bank of England into the end of 2015.

This saw the sterling rally that characterised the start of the year come to an end.

January data showed UK inflation fall to 0.5% taking the pressure off the BoE to rush into an interest rate rise. The improvement in expendable income has been reflected in some strong retail sales data, significant in that consumers are a key driver of the UK economy. 

"Will interest rates rise? The UK saw encouraging growth indicators in the early part of 2014, but faltered in the latter part of the year. Given the Bank of England (BoE)’s cautious stance on interest rates, we expect them to be raised slowly – if at all. Further falls in unemployment may increase the chances of a potential interest rate hike, but will not be the direct cause of such an action," says Charles Purdy at Smart Currency Business.

Downward Pressures on the Euro in 2015

• Greece - Anti-austerity party Syriza leads the polls in Greece. Success for the party in the Greek General Election on 25th January would put the country at odds with the Eurozone’s austerity aims. Could a destablising exit be on the cards?
• Politics - "General Elections in other Eurozone states – such as Estonia, Finland, Portugal and Spain – this year could also have significant ramifications on the Eurozone economy on the whole in 2015," says Purdy.
• ECB Sovereign Quantitative Easing - The fight to stimulate growth in the Eurozone could see the ECB flood the financial system with euros by buying up the debt of Eurozone governments. Increased supply of currency = lower exchange rates.
• Stagflation - Lower oil prices and weak consumer demand keep inflation lower. But stagflation occurs when falling prices meet falling output. 
• Negative Interest Rates - The chance of a euro-supportive interest rate hike remains remote.