GBP/EUR Forecast @ 1.300 - German Economic Recession Fears Point to Potential for a Sheepish ECB

The euro is likely to stay under long-term pressure on exchange rate markets as the Eurozone economy stutters with falling German exports raising temperatures at the ECB.

While the background noise points to a supportive environment for the pound to head higher against the euro, the Bank of England could itself yet scupper a higher sterling, or forestall an extension of the rally at the very least.

At the present time the British pound to euro conversion (GBP/EUR) exchange rate is quoted at 1.2718.

Beware: The above are spot market quotes, your bank will affix a discretionary spread to the figures. Note that an independent FX provider is able to provide up to 5% more currency in some cases by getting closer to the market, learn more.

Poor Growth in Eurozone = Sheepish ECB

The Fed and Bank of England will likely begin tightening while the European Central Bank and Bank of Japan continue easing in 2015.

The viewpoint that the ECB could soon aggressively expand its balance sheet was made all the more valid today as Germany announces another set of dismal economic figures:

"Today’s German trade balance figures have confirmed, rather than confounded, the growing fears that rather than leading its fellow members into a healthier recovery, Germany is being dragged ever closer to recession," says Alastair McCaig at IG.com.

Germany reported a 5.8% drop in exports on a month-on-month basis in August. Analysts had only expected a drop of 4%.

This data only adds to the already dire releases we have seen this month. Earlier this week it was reported that industrial output figures for August plunged by 4.0 pct - the biggest fall in five years.

If Germany falters we would expect German resistance to further action at the European Central Bank will fall away.

This could open the doors to full-blown quantitative easing something that could well give the pound euro exchange rate a leg up to and beyond the 1.3 level.

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Bill McNamara at Charles Stanley holds one such bullish forecast:

"The UK currency has run into selling pressures once again as it tests resistance in the region of 1.285 (i.e. the intermediate peak from 2012) although the broader technical picture is still suggesting that this is likely to be a temporary phenomenon.

"Given the divergent monetary policies in the two areas it cannot be too long before sterling is back above 1.30."

But the Bank of England Could Shock GBP Lower

All assumptions are for the Bank of England to lead the pack and raise interest rates early in 2015.

This scenario is the key fundamental behind the the current strength witnessed in sterling through 2014 and has seen the pound euro exchange rate rise from the year's low of 1.19 to current levels.

But, what if this scenario were questioned?

Following signs that the Eurozone could be heading back towards recession, many commentators are now wondering whether the Bank of England will hold fire in light of the potential harm a receding Eurozone may have on the UK economy.

Today we got news the BoE is holding fire, Olympia Trust tell us it may do for a while longer yet:

"Interest rates in England remain at record lows as BoE Governor Mark Carney weighs concerns over the lack of significant domestic growth and fears of a slowdown in the economic recovery of the Eurozone.

"Analysts are reticent to speculate on the direction of the next rate move in England since the Monetary Policy Committee in that country was split with respect to the need for a rate increase, with the majority agreeing to hold rates steady.

"The split was a result of contrasting viewpoints on economic growth signals versus a lack of sustained investment in short-term securities and a substantial drop in exports."

With the Eurozone economy slowing down will we see the majority of members remaining resolutely against raising rates?

The Bank Will Have to Act (a Pro-Sterling Scenario)

Nevertheless, there are those who remain bullish on the GBP saying rising rates at the Bank are an inevitability.

David Lamb, senior dealer at the foreign exchange specialists FEXCO is one such bull:

"The MPC's dissenting hawks continue to be drowned out by the dovish majority - but for how much longer?

"After months of marching in tandem, ratesetters in London and the US are getting closer to breaking their monetary policy lockstep.

"Yesterday the Fed's latest minutes revealed just how far the US is from hiking interest rates. While noone is surprised by today's Bank of England's rate hold, the case for a rise in UK rates is picking up steam.

"With the IMF predicting that the UK will grow faster than any other G7 economy this year, the MPC's hawks will not remain in the minority forever. While any rise is likely to be modest and unlikely to come until the first quarter of 2015, the prospect is becoming ever more real - and that is steadily strengthening Sterling.

"The Pound continues its robust run against the wallowing Euro, and the suggestion that UK and US interest rates could finally move out of sync is nudging it up against the Dollar too."