Pound Forecast to Stay Pressured vs Euro as Oil Price Slump Bites

Falling oil prices have a negative impact on the currencies of oil producing countries such as Canada and Norway. But could it negatively impact the pound sterling?

Analysts at KBC Markets tell us that it is indeed possible that the pound will come under pressure against the euro in coming weeks as oil prices remain suppressed.

We hear more concerning this viewpoint, as well as other projections for this currency pairing below.

First, the pound and euro rate today:

• At the weekend the British pound to euro exchange rate (GBP/EUR) is offers a conversion is at 1.2574.
• Inversely, the euro to pound exchange rate (EUR/GBP) is at 0.7962.

Be Aware: All currency quotes seen here are taken from the spot market - your bank will subtract a spread at their discretion. However, an independent FX provider will guarantee to undercut your bank, thereby delivering up to 5% more currency in some instances. Find out how.

Are Oil Price Declines a Negative for the Pound?

Yes Suggest KBC Markets. In a note on the matter, analyst Piet Lammens says:

"EUR/GBP initially hovered in a tight range roughly between 0.7905/30. The pair dipped to low area of this range as the first regional German inflation data came out on the softer side of expectations.

"However, contrary to EUR/USD, EUR/GBP soon reversed most of the losses. The decline in the oil price probably was a slightly negative for sterling against the euro, too.

"However for now the impact of oil on GBP trading remains limited. The soft intraday tone towards the UK currency and oil-driven USD strength was also visible in cable as the pair dropped from 1.58 + levels to the low 1.57 area."

Why would falling oil prices impact the GBP complex in a negative fashion?

Falling oil prices will ensure inflation keeps low. We have discussed at length the impact of inflation on the pound exchange rate complex, click through to discover more about the dynamics of inflation, the central bank and the pound sterling.

With analysts expecting further declines in the oil price we could therefore see the GBP to EUR exchange rate remain under further pressure.

Furthermore, as a net oil exporter the UK will see receipts from the sale of oil fall.

RBS analyst Gregg Gibbs tells us:

"The UK is a net oil exporter and the GBP should be undermined. CAD is also threatened. EUR has traditionally benefitted from higher oil prices as petrodollars are diversified from USD to EUR, conversely lower oil prices might weaken the EUR.

"However, with safe EUR assets and deposits yielding near zero or below, it is doubtful that there has been much flow from central bank fx reserves or petrodollars into EUR of late that might now flow out. EUR is probably not much affected, and in my view likely to remain weak regardless of oil price developments."

Euro: Longer-Term Loser

Despite falling oil prices pressuring the pound near-term, longer-term predictions continue to see sterling advancing against its Eurozone counterpart.

In their latest currency forecast note, Barclays give their reasons for betting against the shared unit:

ECB action and disappointing euro area economic developments have only increased our conviction in a more rapid and sustained depreciation of the EUR

October’s noticeable spread widening in Europe’s most highly indebted periphery countries testifies to markets’ residual concerns about fiscal sustainability in euro area countries and the structure of the European Monetary Union (EMU)

The euro area’s difficult economic situation and increased signs of market unease suggest that the distribution of risks now may be even more skewed towards lower EUR exchange rates

With euro area broad-based returns to capital depressed by the economic outlook, negative nominal rates discouraging EUR ownership, and a slow rise in inflation making real rates progressively more negative, a sustained downtrend in the EUR is likely

We expect this to be supported by an expanding ECB balance sheet that will include European government bond (EGB) purchases beginning in the new year