GBP/EUR Forecast: Can the 2014 Rally Continue or Will Scotland Scupper GBP's Hopes?

The rally has stalled for the time being with consolidation setting in - the question is will the exchange rate beak higher or lower once this phase ends?

Latest Pound Euro Rates for Reference

• At the time of writing (06/09) the pound to euro exchange rate is at 1.2612.
• The euro to pound conversion is at 0.7934.

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The Key Risk to the Pound

The GBP really should be doing better than it is - the September round of PMI data releases have all come in ahead of expectations confirming the UK economy remains in good health.

However, the thorn in the side of the pound sterling sellers at present is the issue of the Scottish referendum.

With the race tightening money markets have to now contend with the prospect of a disintegrating union and all the implications this presents to the financial system.

Uncertainty is the traders worst enemy and only a No vote would provide the stability markets require to push GBP/EUR to new highs.

The euro: ECB action keeps Euro Rates Under Pressure

The euro is meanwhile subject to intense pressures stemming from policy changes made at the ECB.

"The GBP/EUR rate edged back above the 1.26 mark on the Thursday as the ECB surprised the market and cut rates further. The main refinancing rate was cut by 10 basis points to 0.05% and the deposit rate was lowered to -0.2%. The currency suffered further after ECB President Draghi said in his press conference shortly afterwards that the central bank would purchase a broad portfolio of asset-backed securities starting next month," says Kamil Amin at CaxtonFX.

He also revealed that the policy decision was not unanimous and that some governors wanted further action.

"It now appears as though there is uncertainty from both a sterling and euro perspective, and as a result it is very difficult to predict any directional movement we could see," says Amin.

Forecasts for the pound to euro

BNP Paribas reckon fresh ECB easing is negative for the EUR from three standpoints:

(1) it again highlights policy divergence between the ECB and other G10 central banks, including the Fed and BOE;

(2) it moves rate differentials against the EUR and encourages the use of the EUR as a funding currency; and,

(3) it underscores the ECB’s willingness to act to prevent a further decline in inflation expectations, helping to cap real rates.

With regards to their exchange rate forecasts BNP tell us:

"We expect broad EUR depreciation to continue over the medium term, and we continue to see scope for the EUR to lose ground in the near-term vs. a number of crosses.

"Short EUR/GBP targeting 0.76, and a short EUR/CAD targeting 1.38."