Euro, US Dollar and Pound Forecasts: Exchange Rate Markets Settle

Investor risk sentiment is improving thanks to the ECB, who hinted at more monetary easing as early as March. The news could be good for the British pound while weighing on the euro exchange rate.

After trading to significant lows against both the EUR and USD last week, we now ask “What’s next for GBP”?

"Despite the brief correction on Friday, there remains limited fundamental reasons to chase GBP upside; the risk environment will continue to serve as the key near-term driver, especially in the absence of any domestic inflationary catalysts to shift the bleak GBP outlook," says Viraj Patel, FX Strategist with ING in London.

Better entry levels to sell EUR/GBP may arise after next week’s BoE Inflation Report (4 Feb) says Patel.

We keep an eye on global market conditions too; are investors calming down after the heavy selling pressure seen over recent weeks. This is important as in the short-term high risk currencies are likely to be better supported then their safe haven bretheren in more positive conditions. 

On the ‘risk gradient’ the pound sits above both the US dollar and euro, so its star could be rising whilst the other two's may be setting.

Therefore, if markets are going to rise we would expect a better performance from the British pound against both the euro and dollar while higher-risk currencies such as the Australian and New Zealand dollars should fare even better.

Exchange rates today

Pound to euro: Market = 1.3131, Bank = 1.2763, Independent = 1.2973. Check the latest rates now.
Pound to dollar: Market = 1.4247, Bank = 1.3848, Independent = 1.4076. Check.
Euro to dollar: Market = 1.0850, Bank = 1.0425, Independent = 1.0770. Check.

US Dollar Outlook: Downside Risks

Interest rate policy in the United States dominates the agenda for the Greenback.

The Fed is widely expected to make no changes in its meeting this Thursday.

The FOMC statement will be scrutinised in search of clues about the path of future rate hikes.

“We see downside risks for USD versus high beta currencies this week due to further short squeeze in risky assets. Expectations of an easier monetary policy stance in the euro area in the near future should continue supporting risky assets in the near term,” say Barclays in a foreign exchange note to clients.

Barclays confirm that commodity and emerging market currencies and risky assets should find some support while EUR should continue with downward pressure.

The pound to dollar exchange rate has recovered lost ground over recent days, but we are hearing some big-name strategists are looking to sell the GBPUSD on strength in anticipation of a resumption of longer-term downside.

Euro Outlook: EURUSD Looks Historically Cheap

The pound to euro exchange rate recovered lost ground over recent days.

The EUR weakened last week as the ECB’s Governing Council unanimously agreed to review and reconsider policy at the March 10 meeting.

Although the outcome of the meeting was more dovish than markets had previously envisioned, given that the ECB had eased policy in December, strategists at Barclays say they are not surprised by the ECB’s course of action given the soft inflationary environment and the material deterioration in medium- and longer-term inflation expectations.

“Indeed, we take the January ECB meeting to be a strong signal towards future action at the March meeting and think a 10bp deposit rate cut or additional QE is feasible (see ECB: Leaning towards further easing in March, 21 January 2016),” say Barclays.

A move back to trading fundamentals errs on the side of EURUSD downside, also in the context of underpriced Fed rate hikes this year.

“Yet, EURUSD puts look historically cheap relative to calls across the curve, offering a compelling opportunity to express downside through options,” say Barclays.

British Pound Outlook: A Turning Point?

Despite another round of uninspiring data, the GBP finally saw a rebound last week following a more dovish ECB press conference.

“We have highlighted the risk for a EURGBP reversal over the past two weeks as momentum indicators were indicating oversold GBP conditions,” say Barclays.

Meanwhile Viraj Patel, FX Strategist with ING in London asks a question many in the market are pondering - is it time to sell EUR to GBP after the recent rally?

"Not yet, in our view, as risk sentiment is likely to remain choppy this week. While the pair is trading above its fair value based on our short-term financial model (0.7500), better entry levels may arise after the coming Fed and BoE meetings," says Patel.

A dovish Fed may keep the EUR bid, while the BoE Inflation Report (4 Feb) is likely to be GBP negative (though the bar is high for the MPC to sound even more dovish).

Will the rebound continue or will a refocus on Brexit risks and the Bank of England’s reluctance to raise interest rates weigh once more?

Barclays say they expect to see the euro to pound rate move lower this week, “and see scope for a further move lower in the near term, given the rapidity of the move to the topside and increased market pricing of additional ECB easing in the coming months.”

The same goes for the pound to dollar rate:

“Although we continue to look for trend depreciation in GBPUSD, we think that a further near-term correction is likely as the market looks for better levels to re-engage in core GBPUSD downside positions ahead of the UK referendum later in the year.”

Furthermore, Barclays believe markets are far too pessimistic on the market’s pricing of the first Bank of England interest rate rise.

“Our revised timing of BoE lift-off (Q4 from Q2 previously) however, continues to represent upside risks to our GBP view in the context of extremely dovish market pricing,” say Barclays.

Risks are to the upside.