Pound Euro Exchange Rate Forecast to Focus on 1.37 Area Medium-Term

Those looking to make currency transfers and payments on the back of a higher British pound to euro exchange rate will be disappointed with the March capitulation.

End of month rally for GBP as Carney confirms next change in rates is higher.

However, new research from Lloyds Bank confirms that those with patience should see the 2015 highs attained once more.

The catch is that the waiting game will have to be played with a return above 1.40 likely only in the latter half of 2015.

Highs and Lows

GBP/EUR enjoyed a rapid ascent over recent months, hitting a 7-yr high of 1.4256 in mid-March.

“The combination of ECB QE, diverging UK and euro area bond yields and ongoing uncertainty over the future of Greece have all weighed on the single currency, while sterling appears to have benefited from its perceived status as a European safe-haven,” say Lloyds Bank in the latest edition of their International Financial Outlook.

Although it has recently fallen back below 1.40 in response to a scaling back in UK rate expectations and some better euro area economic data, GBP/EUR is still up by over 10% since mid December.

At the time of writing the pound to euro rate has rallied on the back of comments made by Bank of England Governor Carney in which he confirmed the next move in interest rates is higher.

• The GBP-EUR is quoted at 1.3696 at the time of this article's most recent update.
• Turning the equation around the euro to sterling is at 0.7302.

NB. Currency quotes mentioned here refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more.

Forecasting Consolidation and then Gains

Analysts at Lloyds say that over the coming months they expect GBP/EUR to centre performance around the 1.37 level.

“Downward momentum in EUR/USD is expected to be broadly matched by weakness in GBP/USD given the uncertain UK political outlook. On the assumption the UK’s political risk premium fades over the summer, GBP/EUR is expected to resume its upward ascent, pushed higher for much the same reasons as GBP/USD,” say Lloyds.

By end year, the bank is forecasting the British pound to trade at 1.44 against the euro.

EUR/USD Outlook Softer

Turning to the world's most heavily traded currency pair, the euro dollar rate, analysts at Lloyds join those who are saying parity is not going to be achieved this year.

In the euro area, the start of QE by the ECB and continued tensions between Greece and its creditors have added to further downward pressure on the euro.

“We have revised down our profile for EUR/USD to 1.05 from 1.10 at end- June, but see it rising to 1.07 (previously 1.17) at end-2015,” say Lloyds.

Notably, analysts are cutting their predictions for the performance of German 10-year yields and now see them at 0.5% at end-2015 from 0.8% last month.

A change in the bank’s US policy rate call has also led Lloyds to lower the projection for 10-year Treasury yield to 2.6% from 2.8% at the year end, though this is still a rise of about 60bps from current levels.

UK yields have also been pulled lower as a result, with the 10-year gilt yield now expected to be 2.2% at end-2015