Euro & Pound Sterling Forecasts Upgraded

Modified: Monday, 10 July 2017 15:26 BST
Written by: Gary Howes

Pound to Euro exchange rate today: 1 GBP = 1.1293
Pound to Dollar exchange rate today: 1 GBP = 1.2863

Foreign exchange analysts at National Australia Bank - the global financial services provider - have announced they are upgrading their forecasts for Pound Sterling and the Euro.

“We nudge up near-term GBP forecasts given the rate debate, but GBP gains likely limited,” say NAB in a foreign exchange strategy note dated July 10.

Expectations for a rise in UK interest rates are behind the financial service giant’s upgrades to Sterling and offers some hope for those wanting a stronger Pound that the post-Brexit period of declines has ended.

A recent shift in opinion amongst the Bank of England’s top brass that favours at least one 0.25% interest rate rise at some point in the near-future has underpinned Sterling of late and this should continue to offer near-term support we are told.

Both Bank of England Governor Mark Carney and Chief Economist Andy Haldane have signalled a desire to see a nudge up in interest rates with the move coming in either August or November, depending on whether or not upcoming data releases are impressive enough.

Haldane notes some of the post-Referendum fears on economic growth have failed to materialise, with growth more resilient than expected, while the composition of growth has also changed with declining consumption being replaced by higher exports and business investment.

Haldane also believes that UK businesses, which have grown large balance sheet since the 2008 financial crisis, will start investing more.

“We don’t doubt there is some truth in the view from Threadneedle Street that UK companies have strong balance sheets, low cost of capital and are ‘emerging from under the duvet’, much like the UK did in the 1992 post-ERM period,” say NAB.

An expectation for increase investments - that would presumably include investments in staff via higher wages - would be a strong positive for the longer-term prospects of the UK economy, and by extension Sterling.

The prospect of higher rates in the UK sees NAB raise their end-2017 forecast for GBP/USD from 1.24 to 1.27. The March 2018 forecast is raised from 1.26 to 1.28 and the mid-2018 forecast is raised from 1.25 to 1.28.

However, these forecast upgrades are tempered by the observation that UK economic data is showing growth rates are slowing, which suggests the Bank of England might not be able to fulfil its desire to raise interest rates.

So there are certainly some caveats to the view that Sterling will move higher.

Euro Forecasts Upgraded

The Euro is also subject to forecast upgrades having been one of the best-performing major currencies of 2017.

“With our expectation of an ECB tapering announcement 7 September and a likely removal of the pledge to extend QE at the 20 July meeting, we revise up our September forecast to 1.17,” say NAB.

Should the EUR/USD move to this level, the rough 1.05-1.15 range the exchange rate has sat in for two and a half-years would be broken.

Behind the improvement in the Euro’s outlook lies the European Central Bank.

ECB President Draghi’s Portugal speech on 27 June has been described as a game-changer after it effectively signalled a move away from the ECB’s long-held easing bias.

Draghi told an audience of fellow central bankers in Portugal in late June that the ECB will need to adjust its policy parameters in line with the recovery in order to keep its policy stance broadly unchanged.

The ECB now believes the ‘balance of risks’ on economic growth are to the upside.

And at the ECB's 8 June policy meeting, Draghi underscored his confidence in the Eurozone economic recovery.

“The hints and nudges from the ECB are now coming thick and fast, aided by similar nods from other central banks,” say NAB.

NAB believe the ECB is now readying the market for an announcement in the coming months of a tapering of its asset purchases.

“The run of incremental policy adjustments confirms that the era of open-ended quantitative easing is over,” say NAB as they raise their September 2017 EUR/USD forecast from 1.12 to 1.17.

The December forecast is raised from 1.13 to 1.15 while the March 2018 forecast is raised from 1.15 to 1.17.

So it would appear that 1.17 is the maximum we can expect over coming months. Why?

“We don’t think the EUR will extend much beyond there until 2018,” say NAB who expect a US Dollar fightback to emerge.

Analysts see the Dollar rising in the second-half of the year but the view is predicated on the US economy delivering some strong data and the Federal Reserve delivering three interest rate rises in 2018.

Whether or not President Trump can deliver on his policy ambitions of lower taxes and higher spending will also be important for the Dollar’s evolution.