Sterling Could be ‘Next US Dollar’ says new 2016 Forecast for GBP/EUR Rate

The pound could be about to out-perform the euro and other major currencies as it inherits the US dollar's impressive strength.

A rate of 1.45 GBPUSD is forecast in March 2016.

“We see particular scope for large gains against some of the other European currencies like the EUR, NOK, and SEK."

The pound sterling has been a middle-of-the-road performer for much of 2015.

The rally in the pound to euro exchange rate conversion (GBP-EUR) that characterised late 2014 ended while losses against the US dollar were also answered by a decent GBP-USD correction higher.

However, a new foreign exchange forecast for the remainder of 2015 and 2016 suggests sterling could ultimately lead the pack and be the currency to beat.

Rates to Reference

• The pound euro exchange rate is currently seen 1.3748.
• The pound dollar exchange rate is meanwhile at 1.5451.

* All currency quotes mentioned here refer to the wholesale market.

Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more on how this is achieved here.

The Long-Term Outlook is Positive

No doubt, traders will be opting to stay clear of the pound sterling at the present time owing to political risks.

We cite political uncertainty and slowing of data as two prime factors explaining IMM data that shows speculative sentiment is almost universally bearish on GBP.

Nevertheless, “we think that we are nearing a pivotal point that makes the currency look more attractive,” says a new 2015 / 2016 currency forecast note issued by TD Securities.

Analysts have cited advances against the euro and Canadian dollar as being two areas where speculators could lock-in profit.

The current side-ways orientated trade in the British pound could however yet run further particularly as uncertainty surrounding the political landscape and data releases persist.

“Heading into the second half of the year, once we’re past the short-term uncertainty, we would look at GBP as potentially being the “next USD” after the USD’s substantial appreciation since the middle of last year, given that we see the BoE as being the next major central bank to raise rates,” says Jacqui Douglas at TD Securities.

GBP assuming the crown of the ‘next USD’ is quite a claim; the dollar rally has been one of the strongest and most spectacular trend moves seen on global currency markets for some time.

“We see particular scope for large gains against some of the other European currencies like the EUR, NOK, and SEK, as the rest of Europe focuses on the race to the bottom for rates,” say TD Securities.

It’s All About the BoE

Key for the sterling’s outlook is the Bank of England (BoE) and their intentions to raise interest rates.

With a good portion of advanced economies looking to cut rates the BoE stands apart with the next move on rates to be higher.

This creates a yield advantage - global money will seek higher interest rates and in the process the inflows drive up the value of the pound.

TD Securities believe the Bank of England will deliver its first rate hike in February 2016. Contrast this to a more bullish Lloyds Bank who see a rate cut coming as early as November.

The Bank of England, and markets, will continue to focus on the positive economic story in the UK. This morning we had confirmation that economic growth will likely remain on track with April Service PMI data beating expectations comfortably and defying predictions of a slowdown.

The Fundamentals: Inflation = Negative

The idea - Higher inflation will push the Bank of England into an interest rate cut as higher interest rates tend to stem price increases.

UK inflation has been largely in line with the BoE’s forecasts over the last few months, but has generally surprised consensus to the downside with a reading of 0% being delivered.

“As a result, we’ve seen consensus expectations for the first BoE rate hike shift back from Q4 2015 to our forecast of Q1 2016, as it becomes increasingly clear that oil prices are not going to bounce significantly higher, and CPI is going to remain low through the remainder of the year,” concedes Douglas.

Furthermore:

“While it’s the 2-3 year ahead forecast that matters most for monetary policy, we think that the optics of spot inflation also matter, and can’t see the BoE hiking while CPI is still below 1% and Governor Carney is still writing letters to the Chancellor.”

Improving Jobs Market = Positive

The idea - Falling unemployment and rising wages shows can aid inflationary pressures. It is also a sign that the economy is truly ready to handle higher interest rates.

The improvement in the unemployment rate continues despite some recent slowdowns in the rate of improvement.

As the unemployment rate falls closer to its equilibrium rate, we’ve finally seen some upward pressure on UK wages, although perhaps not quite as much as the BoE anticipated.

“The broader labour market story remains one of gradual improvement, and should keep the BoE on track to start raising rates early next year, as any excess capacity continues to be absorbed,” say TD.

The Fundamentals: Consumers to Drive UK Economic Growth = Positive

The idea - Consumer spending is a cornerstone of the UK economy, strength here confirms a strengthening economy.

Analysts note that there has been a lot of head scratching over the fact that US consumers seem to be saving all their extra cash in hand from lower petrol prices instead of spending it, there has been no such concern in the UK.

Retail sales have been a little choppy over the last few months as holiday spending was shifted forward and then had to even out afterward, but the broader trend is still extremely strong.

“Q4 saw the strongest quarter for retail sales in more than a decade, and Q1 sales growth did admittedly halve but was still solid at about 1.0% Q/ Q. UK consumers have clearly taken advantage of the savings from lower petrol prices, and combined with wage growth finally showing signs of life, we should expect consumer growth to continue to drive the UK recovery through the rest of the year,” says Douglas.

2015 and 2016 Forecasts for the British Pound

How does the above translate into GBP performance?

Interestingly, the US Dollar will likely continue to maintain the upper hand, this is largely on the observation that the US Fed will be a step ahead of the Bank of England in raising interest rates.

By year end the pound to dollar exchange rate is forecast at 1.39, marking a low point suggests the analysis from TD Securities. A rate of 1.45 is forecast in the March 2016 while gains towards 1.48 are predicted by the end of 2016.

The pound to euro exchange rate, by contrast, is expected to absorb much of the GBP’s strength. 1.4493 is forecast by December 2015 while a high of 1.47 is predicted by mid year 2016.

Euro gains will then see the GBP-EUR subside to 1.4085 by the end of 2016 in the opinion of TD Securities.

Above Courtesy of TD Securities.

* All currency quotes mentioned here refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more on how this is achieved here.