2014 Forecasts for the Pound Euro Exchange Rate: The Definitive List

Forecasting currency movements is not for the faint hearted. In 2013, we saw a range of nearly 9% between the highest and lowest €/£ exchange rates. As this movement was both ways, we effectively saw a ‘total’ movement of nearly 16%.

Forecasts from major financial institutions for the GBP/EUR rate in 2014 vary dramatically, with a predicted median of 1.2505 at the end of 2014.

When you look at this year’s forecasts, the range is quite staggering; the minimum forecast rate is €1.0897/£1 in twelve months’ time and the maximum is €1.4000/£1

The range from the banks we have listed is a maximum rate of €1.3333/£1 and a minimum rate of €1.1719/£1, which would mean that for each €1 million changed from or to sterling, you could be nearly €100,000 better or worse off!

013 was a ‘game of two halves’ for sterling. In the first half, we saw sterling continue in the same vein it had ended in 2012, rapidly losing ground against the euro and the US dollar. There was a belief that the UK had entered a triple dip recession, and growth looked unlikely.

The reality was somewhat brighter. Mark Carney stepped in as the new Bank of England (BoE) Chairman mid-year, presenting a forward guidance policy that pegged the Bank Rate at 0.5% until unemployment dropped to 7%, with rates subject to change given a threat of consumer price inflation of 2.5% or more.

Rates were widely expected to stay pegged until 2016, but the UK economic landscape has changed since mid-2013, enjoying growth that is the envy of the Eurozone. Business confidence increased, and inflation fell close to the 2% target.

The government has done a commendable job in keeping interest rates down on government debt, but the economic situation is far from perfect. Significant problems linger: there are high levels of government and personal debt, the balance of payments is still in deficit; and the government still spends more than it raises in taxes

Mario Draghi, the President of the European Central Bank (ECB), made it very clear mid-2013 that he would do whatever it took to keep the Eurozone and the euro intact. This rhetoric was very successful as we saw the euro maintain an upward trajectory against sterling and the US dollar over the next eight months.

However, Eurozone economic performance on the whole has been somewhat moribund. Countries like Germany have continued to grow and export successfully, but as we move South we see economies struggle to register growth of any sort, suffering from record levels of unemployment and continued austerity measures. There were fewer bailouts in 2013 than in 2012, but we did have the unsavoury position in Cyprus, with depositors seeing a significant proportion of their bank balances being wiped out if they held over a certain level.

This lacklustre performance has worried the ECB, particularly since inflation has remained low and the possibility of deflation persists. These have led the ECB to reduce their interest rates to a record low of 0.25%; and the markets think there could be further interest rate cuts and/or increases in the coming months to help boost activity and avoid deflation, which would undermine the euro.

Other challenges faced by the Eurozone include its search for a central banking supervisor who will get on top of bad debts (the key reason for Japan’s two ‘lost’ decades) and the precarious position of Germany’s support for the Eurozone, given the recent re-election of Chancellor Merkel at the expense of a coalition with her main opponents. France and Italy are both struggling to maintain consistent growth, with the former in recession and the latter’s debt edging to the point of no return.

Median forecasts suggest that the sterling will strengthen against the euro to 1.2505 by the end of the year.

The outlook for the UK and sterling is optimistic, due to a string of positive data which strengthened sterling towards the end of 2013.

The UK’s labour market is expected to improve throughout 2014, with the overall rate of unemployment nearing the BoE’s 7% target, leading the central bank to contemplate raising interest rates. Should this occur, some analysts are suggesting that the BoE may revise the unemployment threshold to 6.5% in order to reduce the possibility of a rate hike in 2014. Individuals and companies in debt could also face significant difficulties due to a rise in interest rates.

A strong pound in the first quarter of 2014 would hurt the UK’s export market and could lead to a subdued growth, which in turn could weaken the pound later in the year.

Sterling’s strong performance towards the end of 2013 has led to speculation that the currency has been ‘overbought’, rendering it susceptible to a sharp depreciation or ‘market correction’

Analysts also fear that cheap credit and the UK government’s ‘Help to Buy’ scheme could cause a property bubble which, upon bursting, could plunge the UK back into recession.

Despite the continued chatter of further bailouts and the possibility of the euro breaking up, the euro was one of the best-performing currencies in 2013, which makes it susceptible to sharp depreciation in 2014.

The Eurozone welcomed Latvia as its eighteenth member on 1 January 2014. It remains to be seen if this will have any bearing on the euro’s fortunes this year.

The ECB cut interest rates to record lows in November 2013 to promote consistent growth. The central bank looks set to maintain this tone throughout 2014, with potential further interest rate cuts and even a negative deposit rate, which would weaken the euro.

The risk of deflation continues from 2013 into 2014, limiting the ability of the ECB to increase interest rates.

Elections for the European Parliament are set for May 22-25 for member states, which could shift priorities in the Eurozone.

2014 sees the start of a Eurozone banking union, with bank supervision due to commence in November. European Finance Ministers are due to finalise negotiations over the coming months; the process is unlikely to be straightforward and is likely to require a long transition period. As such, the banking union is not expected to solve the issue of sovereign debt in the near future