Pound Euro Exchange Rate Forecast: GBP/EUR Could Reach 1.28 - But All Eyes Rest on Carney and BoE
- Written by: Will Peters
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However, forecasts continue to suggest the broader uptrend in the GBP is likely to persist with the Bank of England widely tipped to be the first major central bank to begin a period of interest rate hikes. That said, the decision making process of the Bank and its Governor Mark Carney will continue to be scrutinised and create volatile conditions.
At the time of writing we see the following quotations for your reference:
- The British pound to euro exchange rate (GBP/EUR): 0.20 pct higher @ 1.2501.
- The British pound to dollar exchange rate (GBP/USD): 0.01% lower @ 1.6620.
- The British pound to Australian dollar rate (GBP/AUD): 0.12% higher @ 1.7887.
- The British pound to Canadian dollar rate (GBP/CAD): 0.10% higher @ 1.8202.
Please Note: All quotes here are taken from the wholesale markets. Your bank will affix 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.
GBP Hit Hard by Inflation Data
Tuesday the 19th was all about the GBP sell-off triggered by falling inflationary pressures seen in the UK.
U.K. Consumer prices rose at an annual pace of 1.6% last month and month-on-month they fell 0.3% from 1.9% in June.
"With inflation comfortably below the Bank of England’s 2% target and wages growing at their slowest annual pace on record, the monetary policy committee are likely to hold off raising rates this year. That certainly seemed to be the message from their quarterly inflation report last week which highlighted the weakness of wage growth as a factor that would determine the timing and pace of rate increases," says Andy Scott at HiFX.
Monday: GBP Boost Courtesy of Carney
Bank of England Governor Mark Carney has given the UK unit a shot in the arm after an interview with the Sunday Times saw him suggest the Bank of England could hike rates before wages start to increase.
“‘We have to have the confidence that prospective real wages are going to be growing sustainably before raising borrowing costs but we don’t have to wait for the fact of that turn to raise them," he said
“GBP strengthened on the comments against all G10 currencies overnight and EUR/GBP initially dipped below 0.80 earlier this morning," says Morten Helt at Danske Bank.
Sterling is Biggest Loser
The biggest loser in G10 space over the preceding week was yours truly - the GBP, which fell by -0.48% against the USD.
"Sterling was negatively impacted by BoE Governor Carney’s presentation of the Bank’s quarterly Inflation Report. The presentation was more dovish than the market had grown to expect based on recent BoE speeches," says Stephen Gallo at BMO Capital Markets.
Lloyds Staying Positive on GBP/EUR, Bearish GBP/USD
Since hitting a peak of just under $1.72 in mid July, GBP/USD has fallen to below 1.68 - a move that has frustrated those looking to make important pound dollar transactions.
The pound has also ended the month slightly weaker against the euro, at €1.2550 (having reached a 2-yr high of 1.27 in late July).
"It is difficult to disentangle how much of sterling’s drop has been due to temporary factors and how much reflects a genuine shift in sentiment," says a monthly foreign exchange forecast note issued by researchers at Lloyds Bank.
However, sterling sellers should take note as Lloyds have confirmed they are sticking with their long-standing view that GBP/USD
remains overvalued and has scope to fall further over the coming months.
Driving the GBP/USD lower will be an assumption that forthcoming data will continue to highlight the improvement in the US economy.
Furthermore, should the Bank of England communications provide, at worst, a balanced assessment of the UK monetary policy outlook markets will take this as another reason to stay bearish GBP.
"The uncertainty surrounding the Scottish Referendum poses an additional downside risk," warn Lloyds.
HOWEVER, the picture against the euro is certainly more constructive.
"The relatively weaker growth and policy dynamics of the euro area suggest GBP/EUR weakness is likely to be short-lived. We look for GBP/USD and GBP/EUR to end 2014 at 1.68 and 1.27, respectively," say Lloyds.
Foreign Exchange Week-Ahead: Watch Out for UK CPI
The data agenda eases off in the week ahead allowing markets to focus on broader issues.
However there are inflation numbers that could hit GBP/USD lower.
"The tone for the GBP has shifted significantly in the last couple of weeks as the market has shifted from bullish to bearish. We expect offers beneath 1.6750 to cap GBPUSD ahead of the July CPI report due on Tuesday. Headline CPI is expected to show a fall of 0.2% MoM," says Stephen Gallo at BMO Capital.
Furthermore, "August is normally a dull month for FX, but sometimes big moves happen. The Jackson Hole Symposium has previously been a preview of September-November policy shifts by the Fed, so it will drive a little chatter, even if it is mostly closed this year. Geopolitics will also be on the market’s mind—particularly if further escalation in Ukraine triggers additional sanctions by the West on Russia and vice versa," says Gallo.
