Euro Sterling Exchange Rate: Stay Short on EUR/GBP Say Barclays

Analysts at Barclays are forecasting further weakness in the euro exchange rate complex in coming sessions.

Driving the viewpoint is the expectation for extraordinary action at the European Central Bank; the net result will be a lower euro pound exchange rate (EUR/GBP).

"We expect the ECB to launch QE program at next policy meeting on Thursday, which will keep EUR under downward pressure against USD and GBP," says the Foreign Exchange Research team at Barclays.

• At the time of writing the euro to pound sterling exchange rate is at 0.7664.
• The euro dollar exchange rate (EUR/USD) is 1.1622.

With negative inflation of -0.2% y/y in December, market expectations for negative prints through Q3 15 and medium-term inflation expectations, Barclays think the first contingency set by the ECB to justify additional easing has been met.

"Moreover, the same is true regarding the ECB’s second contingency of balance sheet expansion by about €1trn, given only a limited expansion from the current asset purchase programs (including CBPP3, ABS and TLTROs). We think effective QE will assist in re-anchoring medium-term inflation expectations and signal that monetary policy will likely remain easy for longer," says analyst Nikolaos Sgouropoulos at Barclays.

The GBP: Soft MPC Minutes Expected

The euro is forecast to fall against sterling even as the Bank of England (BoE) releases a soft set of minutes covering the January MPC meeting.

The lack of inflationary prices, owing to the sharp decline in oil prices, has seen Barclays revise their UK CPI inflation profile lower for this year and next. The bank now expect CPI to average 0.5% this year and 1.4% next, about 0.5pp and 0.2pp below our previous forecasts, respectively.

"This is likely to be reflected in the BoE minutes, for which we do not expect any changes with regards to votes or the asset purchase program. With little or no clear inflationary pressures in the short-term, we see risks for the MPC to stay patient for some time. Nonetheless, given the increasingly volatile environment in Europe with expectations for ECB QE, rising political uncertainty in the periphery and the SNB constituting negative deposit rates to investor who seek to hold the “safe-haven” CHF, we see upside risks for GBP against other European currencies," says Sgouropoulos.

There are other numbers to be aware of this week - expectations are for the November labour report (Wednesday) to be consistent with the previous month, with a decrease in jobless claimants (-25k after -26.9k) and the unemployment rate (5.9% after 6.0%).

On the wage front, markets expect average weekly earnings to continue to pick up gradually, at 1.8% 3m/y for the headline and +2.0% 3m/y for core earnings.

Also watch UK retail sales (Friday) to maintain their current momentum and come in at +2.6% m/m (6.3% y/y).

"As in recent months, we expect sales in value terms to come in somewhat weaker on the back of substantial retails price deflation," say Barclays.