Lloyds Bank's Exchange Rate Forecasts 2016 to 2017: Dented Sterling Sentiment

Lloyds Banking Group have stood out over 2015 with their constrained predictions for the British pound in 2016. But even they now thing sterling has been oversold.

2016 has thus far been characterised by relentless selling of pound sterling as markets push back expectations for the first Bank of England interest rate rise ever further.

But, what are the limits to GBP's weakness and do those who forecast currencies based on fundamental analysis believe these levels are justified?

As we have noted here already Lloyds have always been constrained in their predictions on the pound to euro exchange rate. But even Lloyds believe the present sell-off leaves sterling looking oversold.

That said, they do see GBPEUR recovering back to 1.40 ahead of a gradual decline.

“On balance, we believe the extent of the recent drop is overdone and look for a near-term recovery towards 1.40 – mostly driven by a softer euro rather than a stronger pound,” say Lloyds.

Elsewhere, “we have raised EUR/USD at midyear to 1.05 from 1.02 and scope remains for further sterling weakness during the year,” say Lloyds.

Regarding cable, analysts reckon:

"Substantial downside risks remain, with GBP/USD hovering precariously close to key support and next month’s BoE Inflation Report and EU negotiations potential flashpoints. We target a move to 1.47 by end Q1, before a renewed pull back to, and possibly below, 1.45 later in the year."

Downside risks to the British pound exchange rate complex have certainly grown according to the British bank:

“Judging by forward money market rates, the market now expects the MPC to keep Bank Rate at 0.5% throughout this year. On top of this, rising EU risk premia has dented sterling sentiment, with recent comments by PM Cameron focusing market attention on the possibility of a 2016 EU referendum.”

Nevertheless, sterling may have overshot the mark, “Given the extent of the recent drop, we believe cable has overshot on the downside, and should benefit from an anticipated recovery in global risk sentiment.”

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Domestically, downward revisions to UK GDP growth for Q2 and Q3 last year and the weakness of inflation have led to a further scaling back in UK interest rate rise expectations.

Judging by forward money market rates, the market now expects the MPC to keep Bank Rate at 0.5% throughout this year. On top of this, rising EU risk premia has dented sterling sentiment, with recent comments by PM Cameron focusing market attention on the possibility of a 2016 EU referendum