Lloyds: Pound to Euro Exchange Rate Will Fall in 2016
Lloyds advise the pound is forecast to strengthen to higher levels than they originally envisaged in 2015. But, from early 2016 the euro will have the advantage.
In the latest International Financial Outlook publication analysts at Lloyds Bank have lowered their forecast profile for the euro exchange rate complex.
Lloyds have told clients they are maintaining their expectation of near-term euro weakness, as prospects of policy tightening comes into sharper focus in the US and UK.
Meanwhile, “although Grexit fears have subsided for now, implementation risks and debt sustainability concerns should keep the euro under pressure,” say Lloyds.
The downgrades come as GBP/EUR is seen hitting an 8-year high above 1.44 in July.
The combination of more hawkish UK monetary policy comments and ongoing uncertainty about Greece’s prospects has fuelled the rally.
“The break higher opens the way for a move up towards 1.50 over the coming months, given the diverging policy outlooks in the UK and the euro area and the likelihood that Greek uncertainty continues to impact euro sentiment,” say Lloyds.
“We have also revised higher our £/€ forecast for end-2015 to 1.46 from 1.44. £/$ is seen weaker at 1.53 by September, but rising to 1.56 by year-end,” says the UK bank.
Note, all currency quotations in this piece are to be assumed as spot market rates. Your bank will deliver a lower rate owing to the subtraction of a spread.
An independent specialist would however gladly get you closer to the market, in some instances they can deliver up to 5% more currency when compared to your bank. Find out more.
Euro to Start Recovering in 2016
The prospects of a sustained rise in GBP/EUR in 2016 are, Lloyds believe, limited.
The above graph suggests that those with euro purchases could have a limited window within which to pick the exchange rate's best level.
The focus is likely to turn to the relative undervaluation of the euro – particularly if, as Lloyds expect, euro area growth continues to post a steady recovery.
President Draghi remained relatively upbeat about euro area economic growth and inflation prospects, but warned that the ECB would act if there is an unwarranted tightening of monetary conditions.
He reiterated that the return of inflation to target would require a “full implementation” of the QE programme through September 2016.
Lloyds have maintained their target for a moderate rise in the 10-year bund yield at 1.0% by the year-end, despite bigger increases in the US and UK.
This outperformance in UK yields will ensure the GBP advances.
Meanwhile, “Brexit uncertainty, fiscal austerity, and the UK’s substantial external deficit with the euro area are also likely to weigh on the pound over the medium term. We have revised up our Q3 call to 1.49 but look for a steady move lower thereafter,” suggest Lloyds.
Regarding the euro / dollar exchange rate, Lloyds have revised lower their €/$ forecast for September to 1.03 from 1.05, but have maintained the year-end target of 1.07, helped by the possibility of Greek debt relief.
