Pound / Euro Conversion Could Reach the 1.40 Exchange Rate Suggests New Forecast

Despite near-term weakness, the longer-term prospects for the British pound against its Eurozone counterpart appears to be backed by the positive momentum afforded by an improving UK economy and the prospect of higher UK interest rates.

However, as the above graph shows, recent weeks have seen the rally halt.

Those with an interest in the pound sterling to euro conversion rate will be disappointed that the rally did not resume following the mid-week release of the much-anticipated Bank of England inflation report (QIR) and UK labour market data.

GBP rates came under pressure after the Bank of England advised there was no reason to raise UK interest rates at the current time.

Following the QIR we see the British pound to euro exchange rate (GBP/EUR) is 0.45 pct lower on a day-to-day comparison with the conversion currently quoted at 1.2707.

Please note that the above quotes will be subject to a discretionary spread by your bank, it can vary wildly from the market rate. If you are looking to make international payments we suggest being quoted by an independent provider. By tapping the wholesale markets they can offer up to 5% more currency in some instances.

Furthermore, you should avoid negative currency moves by ensuring the correct risk controls are in place, learn more.

Forecasting Further Gains for GBP/EUR... (Eventually)

While the rally higher in the sterling euro rate has struggled lately analyst Lucy Lillicrap at brokerage Afex says ultimately further gains are likely to be eked out:

"Looking further ahead an eventual extension to 1.3000 is still implied with dips beforehand thus viewed as broadly corrective.

"However localised resistance now exists at 1.2820/30 and any breach of nearby 1.2700 support could postpone this awaited positive trend resumption for several more weeks (in favour of a re-test of 1.2600 or even the psychological 1.2500 level first).

"Directly or otherwise further gains are readable and on this basis any emergent GBP weakness should continue to prove unsustainable. Although not anticipated directly once 1.3000 gives way 1.4000 will then be reachable long term."

Bank of England QIR Key for GBP Short-Term Outlook

Sterling has meanwhile steadied above Friday’s September 2013 lows against the greenback.

The kind of week sterling delivers should have much to do with the Bank of England’s key inflation and growth report (QIR) on Wednesday.

"Also Wednesday, critical data are due on Britain’s job market. Any tone or outcome that keeps pressure low on the central bank to raise rates over coming months would reinforce the pound’s downturn and keep it biased lower," says Joe Manimbo at Western Union.

Commenting ahead of the QIR is Lloyds Bank Research:

"With rhetoric from a number of BoE officials turning a little towards the dovish side recently, the QIR will no doubt be scrutinised for any clues about the likely path of monetary policy. We expect little change to the projected growth outlook, however near-term CPI projections will likely be lowered reflecting the recent easing in global price pressures.

"The Bank's comments on the continued decline in the unemployment rate and its view on the amount of slack in the economy will be closely watched as well as their assessment of the inflation outlook going forward under current market rate expectations.

"A slight dovish tone is probably expected at the QIR and uncertainty surrounding the event will likely keep GBP relatively sidelined ahead of Wednesday."

The Euro This Week

The euro caught a modest break in cooler U.S. hiring which prompted many in the market to cash in profit on the greenback’s steady outperformance.

"Broader market sentiment augurs further gains for the dollar and more losses for the euro on the view that sooner or later the European Central bank (ECB) would have to deliver stronger stimulus to keep the 18-country economy from tipping back into recession," says Manimbo.

Markets will weigh key data from Europe this week on factories, inflation and revised quarterly growth for clues on when and if the ECB will soon have to come to the rescue.

Eurozone industrial production is due Wednesday, followed by Friday’s second estimates of euro area growth during the third quarter.