Lloyds Hike Pound-to-Euro Exchange Rate Forecasts

Lloyds Bank

Image © Pound Sterling Live

- Base-case 'no deal' Brexit assumption to lift GBP

- But Lloyds wary of volatility in GBP ahead of March 29

- EUR strength a feature of second-half 2019 as ECB raises interest rates

UK high-street lender Lloyds Bank have raised their forecasts for the GBP/EUR exchange rate for the first three quarters of 2019 as an orderly Brexit is achieved by the UK and EU.

In a monthly currency forecast note analysts at Lloyds Bank's Commercial Banking unit show Brexit remains the main driver for their valuations on Sterling, and they maintain a "central assumption remains that the UK and the EU will avoid a ‘no deal’ outcome, and that a political agreement will eventually be reached for an orderly departure."

The call comes as the British Pound is seen trading higher traders have bid higher the British Pound over the past three weeks on an increasingly popular view that the threat of a 'no deal' Brexit is becoming increasingly unlikely.

But while Lloyds have raised their forecasts they say "there is a risk of higher volatility as we approach the March 2019 deadline for Brexit."

Indeed, the rally in Sterling over recent weeks is built on the assumption that a majority of anti-Brexit MPs in the House of Commons will ultimately vote to prevent a 'no deal' Brexit. Analysts at Lloyds note the seemingly firm commitment of Parliament to avoid ‘no deal’ has seen the implied chance of such a scenario (by 29 March) fall to around 10%.

Yet, there is still no guarantee they have the power to deliver such an outcome.

The EU's lead Brexit negotiator Michel Barnier on Wednesday hammered home this point when he told an audience of the European Economic and Social Committee in Brussels that "opposing 'no deal' will not stop 'no deal', a positive majority for another solution will need to emerge."

MPs are scheduled to vote on the government's ‘plan B’ Brexit deal on 29 January, but Parliament’s preferred route to Brexit remains unclear.

"A change in the government’s ‘red lines’, a general election, a delay of Article 50 or a second referendum are all possible," say Lloyds. "Market ‘pricing’ implies GBP/EUR may decline towards 1.09 or rally to 1.17 by 1 April."

Looking at the Euro side of the GBP/EUR equation, we note that Lloyds are optimistic that the European Central Bank (ECB) will still raise interest rates in 2019: a fundamentally bullish outcome for the Euro.

Market expectations for the first interest rate rise from the ECB have been pushed back from late 2019 to mid-2020, thanks to a slew of disappointing data releases over recent months that suggest Germany and Italy would be lucky to have avoided recession in the final quarter of 2019. "We, on the other hand, are more optimistic. Should euro area growth pick up in H2 2019, there is every chance that the ECB will start its tightening cycle by the end of the year," ay Lloyds.

This explains why the GBP/EUR exchange rate is forecast to dip towards the end of the year, even in the event of a 'no deal' Brexit being avoided.

Taking into consideration the above, Lloyds forecast the Pound-to-Euro exchange rate to trade at 1.16 by end-March 2019, up from the 1.13 level forecast back in December. The pair is forecast at 1.14 by end-June, up from 1.13 forecast in December. Analysts are forecasting 1.12 by end-September up from 1.10, and 1.08 by year-end, which is an unchanged target.

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