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- Worst weekly run in two years for GBP/EUR
- Sterling forecast yet lower as economy, global risks weigh
- Euro to find support from ECB policy
The Pound-to-Euro exchange rate is about to notch up a sixth successive week of losses, unless some late-in-the-day buying interest can deliver a strong close ahead of the weekend.
The last time such a run of losses were recorded was in May-June 2017 - around the time of the last General Election - that saw Prime Minister Theresa May's Conservatives lose their parliamentary majority.
Then, as is the case now, the losses come on the back of chronic political uncertainty: "the Pound has been under relentless selling pressure after it became inevitable that Theresa May’s time as Prime Minister had run out. Over the past month the Pound has weakened sharply by around 5%," says Lee Hardman, a foreign exchange analyst with MUFG.
At the time of writing the 1 GBP buys 1.1224 EUR, the week saw the exchange rate open at 1.1240.
Losses in Sterling are therefore relatively shallow at the time of writing, and the currency could yet pull off a weekly advance.
For now it appears selling interest is waning somewhat, with markets appearing to have fully 'priced in' a Borish Johnson premiership after his stonking win in the first round of voting in the Conservative Party's selection process.
But we are told by analysts at one of northern Europe's largest lenders that further losses are likely, and they have therefore decided to cut their forecasts for the British Pound.
Analysts at Danske Bank say it's not just political and Brexit uncertainty that will weigh on Sterling over coming days and weeks: a combination of weaker domestic data, global risk sentiment and European Central Bank (ECB) policy will play a part in a softer GBP/EUR exchange rate going forward.
Lars Merklin, Senior Analyst with Danske Bank, says there is already a large Brexit premium of about 5% embedded into the Pound, and it will take "non-Brexit drivers to weaken the GBP further over the summer."
"We think markets will downplay the risk of a no-deal Brexit as a driver for the GBP in the period ahead. Instead, slightly weaker UK data, global sentiment and the ECB are new headwinds for EUR/GBP," says Merklin.
According to Danske Bank analysts, the Pound is vulnerable to a deterioration in global sentiment on credit risks: the world economy is slowing amidst an ongoing China-U.S. trade dispute and this could in turn impact on UK assets.
Domestically, the consequences of a prolonged Brexit process on consumer spending and corporate investment threaten to slow the economy. Indeed, recent GDP data showed the UK economy contracted in April as the strong start to the year unwound. Considering the robust UK economy has been one area of support for Sterling, any further loss in economic momentum would likely weigh on the currency over coming months.
Then there is the other side of the GBP/EUR equation to consider: the Euro.
Danske Bank expect the ECB to keep its policy settings unchanged going forward, while at the same time the U.S. Federal Reserve could start cutting interest rates.
This should create a divergence in U.S.-Eurozone interest rate dynamics which would favour the EUR/USD exchange rate going higher.
In turn, a stronger EUR/USD would be expected to aid the EUR/GBP higher, ensuring Sterling faces further external pressures.
But, Danske Bank do acknowledge that a key risk to their forecasts are that the ECB follows the U.S. Fed and starts cutting interest rates, "ECB easing in the form of rate cuts or QE and/or further deterioration of the trade war are important downside risks," says Jens Nærvig Pedersen, Senior Analyst with Danske Bank.
A further risk to their view would be a substantial recovery in the Pound should a Brexit deal be secured under the new Prime Minister.
Nevertheless, Danske Bank lower their GBP/EUR forecast to 1.11 from 1.16 for the three-, six- and 12-month time frame. They expect a lower trading range of 1.16 (in case of renewed optimism on Brexit) to 1.0990 (further weakening of data and worsening of sentiment on Brexit).
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