GBP/EUR Forecasts See GBP/EUR Overbought Above 1.35

The contrasting economic performance between the United Kingdom and the Eurozone has reinforced the view amongst currency forecasters that the pound to euro exchange rate (GBP/EUR) could see levels above 1.35 achieved in 2015.

The UK and the EU appear to be on separate economic paths despite the close trading relationship between both economies - and it is this divergence that explains an appreciating GBP/EUR more than anything.

From Europe we have seen more of the same in terms of economic data, which could only be described as ‘lacklustre’ at best.

This has prompted the European Central Bank to introduce an agressive policy of quantitative easing in their July meeting that will see in excess of 1 trillion euros flood the Eurozone financial system.

The same negativity does not stand for the UK though where economic data continues to ensure the UK will remain the best-performing G10 economy in 2014 and 2015 according to the IMF.

This view is backed by the CBI who tell us they are upgrading their forecasted GDP growth rate to 2.7%, up from 2.5% predicted in November.

“Not only is the EU economy stagnating, but they have an unemployment rate close to historic highs at 11.5% and serious concerns about falling into deflation with inflation rising by a mere 0.4% y/y. On the other side of the Channel, the UK economy has seen a million jobs created in the last eighteen months with the unemployment rate dipping to a 6-year low of 6% having been up at 7.7% a year earlier," says Chris Towner at HiFX.

The latest live British pound to euro exchange rate quote sees GBP/EUR at  1.2024.

Forecasting GBP/EUR Pullback in the Near-Term

The achievement of the 1.30 level represents a solid advance into new territory for the sterling/euro.

The resistance point at 1.28 appears to have broken decisively and from a technical perspective the 1.35 zone could now frustrate further buying interest.

So where does the GBP/EUR go from here.

Bill McNamara at Charles Stanley tells us further gains are still possible in the long-run but the GBP is now looking overbought and is prone to correction:

"The UK currency has risen in four of the last five weeks relative to the euro and last week’s minor advance takes it to a seven-year peak.

"This ongoing strength leaves the pound looking relatively overbought – the 14-week RSI has, for example, rushed up to a reading of 74% - and a pull-back of some sort would not be surprising at some point, for the moment, however, the path of least resistance is to the upside."

Below is the longer-term price action picture for the sterling / euro rate to reference.

Eurozone Could Hamper UK Growth

More from the CBI who in February have upgraded their growth profile for the UK economy. Katja Hall, CBI Deputy Director-General, tells us:

“UK growth continues to outshine its counterparts in Europe and progress is ‘steady as she goes’.

“While lower oil prices are keeping costs down for businesses and consumers, the North Sea oil companies are suffering, harming jobs and investment in the industry.

“Now is not the time for complacency, but falling unemployment coupled with improving wage growth and rock bottom inflation should mean that people see more money in their pockets.

“But businesses are looking on anxiously as insecurity continues to troll the Eurozone and instability remains elsewhere.”

The solid growth should see the Bank of England eventually raise interest rates. It is the anticipation of higher rates this causing a significant degree of sterling buying interest.