Euro to Pound Exchange Rate Strengthens, Forecasting Gains to be Capped
The euro to pound sterling exchange rate (EURGBP) has advanced to 0.73 on the last trading day of the month. How long can this strength last?
The British pound is having a poor time on global foreign exchange markets - even before the Chinese ‘incident’ that needs no introduction the pound was falling against the euro.
At the time of writing the pound to euro exchange rate (GBPEUR) is quoted at 1.3675 while the euro to pound is at 0.7313.
Market watchers entered August with hopes of a new 2015 best being achieved, what they got though was a rude reminder of how brutal currency markets really are.
GBP has been under-performing on the back of the equity sell-off, where the large weight of financial services in the UK economy typically weighs at times like these.
“Despite this sell-off, we still think EUR/GBP is far too high at current levels (again UK hard data should hold up) and we still see value in returning to long GBP/SEK positions,” say analysts at ING.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Also backing a return by the GBP over the EUR is analyst Piet Lammens at KBC Markets:
“We still maintain the working hypothesis that the topside in EUR/GBP is growing better protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantial and in favour of the UK currency. A cautious sell-on-upticks approach can be considered,” says Piet Lammens, an analyst with KBC Markets.
Pound Sterling Fails to Get GDP Lift, But the Outlook is Bright
UK GDP for the second quarter of 2015 was confirmed at 0.7% - interestingly the ONS reported that UK exports were picking up at a much stronger than expected rate.
The strong pound may not be such a concern to the economy after all then.
While currency markets failed to respond to the good news the picture is clear - the UK remains a leader in the G10 space in terms of growth and the Bank of England will have to ultimately raise interest rates soon.
Indeed, analysis from the Warwick Business School suggests UK inflation will hit the Bank of England's 2% target in 2016.
Markets are under-estimating the propensity for higher rates in the UK and we believe the GBP should ultimately start rising in value once more.
ECB Could 'Front Load' Quantitative Easing Programme
There are some important people out there who will be concerned by recent moves higher in the euro.
The ECB desperately wants a weaker currency to stimulate Eurozone exports and any strength will be unwelcome.
As such, there are signs that the ECB may seek to hammer interest rate yields and the exchange rate lower in coming months.
ECB Chief Economist, Peter Praet, delivered forceful remarks yesterday that downside risks to inflation had increased.
“This will lead to expectations of ECB staff CPI forecasts being cut next Thursday and raises the prospect of front-loaded QE,” say ING.
The euro was hammered the last time we had talk of the front-loading of quantitative easing.
This is the process whereby the ECB accelerates their purchases of financial assets in order to prompt interest rate yields and the exchange rate lower.
"Any fresh hints of front-loaded QE could push EUR/USD below key short term support at 1.1320 (200 day m.a.) and add to the tentative view that Monday’s 1.1714 high was the extent of the correction. A close today above 1.1400/1440 suggests the correction may still have further to run," say ING.
In the meantime we are hearing that risks to the shared currency have been growing ahead of next week's ECB decision.
There is talk that the ECB could even announce they are considering extending the QE programme beyond September which inevitably amounts to an announcement of more money being made available by the ECB.
This would hammer the euro lower.
A Better Week Ahead for Pound Sterling?
Markets have pushed back expectations for the first BoE hike to August 2016 following “Super Thursday”, as well as the market turmoil of the past couple of weeks and dovish comments from Fed policy makers. We think this is too far out.
“We see a BoE move by 25bp in February. Markets will likely adjust their assessment as they digest the massive moves seen this August. We expect confidence to return to markets soon on the back of positive fundamentals,” says a foreign exchange note from UniCredit Bank.
For the UK, the upcoming PMI data could be a starting point.
Manufacturing will likely slow down to 51.5 as the sector continues to struggle from sterling’s appreciation.
“But on the back of strong consumer confidence and a pick-up in wage growth we continue to see the services sector as robust at 57.5. Short-term, there is a risk that this may not be enough for cable to revert back to its upward trend, but we expect this to correct over a medium-term horizon,” say UniCredit.
