The euro is predicted to enter a period of weakness against the euro in coming months; this according to analysts who are increasingly favouring the pound sterling over the euro.
Weighing on the euro is low inflation; inflation plunged to +0.7 pct in October from 2.5 pct in October 2012. This fall has allowed the ECB to cut interest rates, the move saw EUR slump.
With a weaker Euro now seen on the horizon we hear from a couple of analysts who are predicting a stronger sterling to euro exchange rate.
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Sean Lee at FXWW is forecasting GBP/EUR at 1.25 next year:
"The weekly chart confirms to me that EUR/GBP is near the bottom of a downward sloping channel; the trend is bearish and I still expect to see prices below 0.80 (GBPEUR @ 1.25) early next year but this pair doesn’t move fast so patience is required.
"I’d suggest that .83/.85 (GBPEUR @ 1.2048/1.1765) will contain for the next few weeks and as we know, this pair will edge higher as CB buying kicks in towards the end of the month."
Lloyds Bank Research this morning tell their clients: "GBP/EUR at 1.20 is seen as a significant level, and may hold it short term, but we would expect a steady move towards 1.22."
Kathy Lien at BK Asset Mangement is also forecasting further gains for the GBP/EUR:
"Improvements in U.K. data leaves the BoE comfortable with the existing level of stimulus and while that may not be positive for the GBP/USD because the Federal Reserve is gearing up to reduce stimulus, it is certainly positive for GBP/EUR, after today's surprise 25bp rate cut from the ECB.
"With the currency pair trading at a 9 month low, there is no major support in EUR/GBP until 82 cents (GBP/EUR at 1.22)."
Be warned: The euro is remarkably resilient
Those betting on a one way ride higher for the British pound (GBP) would do well to quell their enthusiasm.
The Euro is a notoriously sticky customer, as Sean Lee mentioned in his aforementioned forecast.
Boris Schlossberg at BK Asset Management says capital flows continue to keep the euro underpinned:
"Despite the sclerotic growth in France, the S&P downgrade and yesterday's surprising 25bp cut from the ECB, the euro has remained remarkably resilient holding above the 1.3400 level throughout the European session trade.
"The unit continues to benefit from capital flows as foreign investors are lured by the prospect of recovery in the region as a whole."
Schlossberg reckons it remains exceedingly difficult for European monetary policy makers to lower the value of the currency in any sustained fashion and this dynamic will likely remain in place until the market becomes more certain that the Fed will taper by the start of next year.
So, in essence, the real trigger for strong pound to euro gains could in fact lie with the performance of the US dollar.
