Pound Euro Forecast to Reach 1.300 GBP/EUR

The euro exchange rate complex has strengthened as we head through the final week of November ensuring the pound sterling is kept under pressure.

Driving the latest bout of confidence in the shared currency is the German IFO report - a reading used to gauge the confidence of German businesses - which exceeded market expectations for the first time since April of this year.

The IFO survey of German business sentiment printed at 104.7 versus 103.0 forecast with current assessment numbers rising to 110 from 108 expected while future expectations rose to 99.7 from 98.5.

The report would suggest that it is not necessarily all 'doom and gloom' when it comes to the German and thus Eurozone economy, a view shared by Heartwood Asset Management (see below).

First, what do the markets look like?

Pound and euro rate today:

• The British pound to euro exchange rate (GBP/EUR) is 0.03 pct higher on a day-to-day basis with the conversion rate located at 1.2597.
• The euro to pound (EUR/GBP) conversion is therefore at 0.7939.
• The euro dollar rate meanwhile regained the 1.2400 mark in the aftermath of the release and continues to climb back towards 1.25.

The above market rate is not available for international payments as your bank will shift the rate in their favour. However, an independent FX specialist will undercut your bank's offer, thereby delivering as much as 5% more currency in some instances. Find out how.

Furthermore, by placing stop-loss and buy orders a specialist will help protect you against the worst-case currency movements ensuring your currency goes further.

Ultimately the better-than-expected data will not be enough to dent ECB President Draghi's efforts to dramatically expand further quantitative easing in order to stimulate growth across the whole Eurozone region.

The focus now falls squarely to next week's ECB meeting which could determine if the euro stabilises at these levels or moves lower.

Forecasting the British Pound to Advance

What does the outlook hold for the sterling / euro pair?

According to analyst Bill McNamara at Charles Stanley the outlook remains positive for GBP in the longer-term:

"The UK currency fell sharply the week before last but last week’s rebound (almost 1%) shows that the medium-term uptrend remains intact. The real surprise here is that it is taking so long for sterling to scale the heights reached in the summer of 2012, at €1.285, but the overall impression (despite its recent stumble) is that this level will give way before too long and that the 1.30 level will come under pressure subsequently."

The outlook for the euro against the dollar is meanwhile also seen as being negative:

"Last week I highlighted the downtrend in the euro through the use of the cloud chart and this continues to demonstrate that the outlook for the single currency remains negative (note how it got close to the bottom of the formation and immediately retreated).

"While the occasional trading bounce is to be expected in the course of this ongoing decline there is nothing in the current technical picture to suggest that the euro has reached a bottom yet; in fact, the next downside target is going to be the low that was recorded in July 2012, at 1.2056."

Have Markets Been Overly Pessimistic Towards the Eurozone

While the above sentiment shown by McNamara is widely representative of many in the currency community we should never lose touch with those who advocate a different viewpoint.

One such pro-Eurozone advocate is Jaisal Pastakia, Investment Manager at Heartwood Investment Management.

Pastakia points out that economic growth in 2015 should pick up; a positive for the EUR:

"Concerns are building that the eurozone is heading towards stagnation, while the bearishness of European equity investors has been driven by the large underperformance of markets in the year-to-date. We believe that the negative sentiment is now somewhat overdone.

"Although headline economic data has consistently disappointed in 2014, underlying details are showing signs of stabilising.  Importantly, bank lending to non-financial corporates increased in September following several months of declines, while the rate of negative year-on-year growth has slowed.

"It is early days, but now that the European Central Bank’s (ECB) Asset Quality Review and stress tests are out of the way, we should see more appetite for lending in conjunction with an easing of credit standards, as evidenced in the ECB’s third quarter Bank Lending Survey.

"Moreover, seasonal factors appear to have contributed to the summer slowdown in Germany, and those pressures look to be abating. A weaker euro should also provide relief to European exporters over the next few quarters, given the euro’s decline back to June 2012 levels versus the US dollar.

"On the policy front, ECB quantitative easing is not guaranteed, but there is a higher probability that it will go ahead, given the Bank’s mandate is to maintain price stability.  

"The ECB has done more than many could have imagined over the past few months, and we should expect the Bank to continue with growth supportive policies. Meanwhile, fiscal policy should be less of a drag on growth in 2015, as the European Commission forecasts a slight easing for the region in aggregate.

"These are nascent indicators, but they provide hope that the eurozone economy is turning a corner, which should be supportive of asset prices in 2015.  European equity is not a favoured trade and investors are generally underweight in Europe, which may provide a foundation for a share prices to recover.

"Full-year corporate earnings in 2014 are expected to be positive for the first time in four years. Furthermore, valuations in Europe remain attractive, especially relative to the US.  Value trades by their nature are slower to come right!

"That’s why we’re sticking with our overweight position in Europe, positioned to capture a potential recovery in earnings, valuations and liquidity."