GBP/EUR Rate Forecast to Fall to 1.30
- Written by: Gary Howes
The pound to euro exchange rate has advanced over the course of the past 24 hours, but this is not enough to arrest the multi-week downtrend.
The euro has dominated its British cousin on global foreign exchange markets since a best exchange rate of 1.44 was achieved in July.
The conversion rate between the two currencies has since slumped to an 8 month low, hit on the 13th of October.
The declines come despite us reporting time and again how the finance world's leading analysts continue to predict a higher GBP to EUR exchange rate.
For instance, Intesa Sanpaolo and Lloyds Bank are both pricing in rates at 1.46 and above by the end of 2015.
It is however warnings for a decline towards the 1.30 level that are actually looking to be the more accurate at this stage.
“Sterling continues to look a little vulnerable against the ‘comeback’ euro and having breached 1.3450, looks set for a test back below 1.30 in the months ahead," says economist Chris Towner at currency brokers HiFX.
Sterling fell by 1% against the dollar and the euro this morning, reaching its lowest level against the euro since May as figures showed headline inflation turned negative again last month.
The continued lack of price pressures is great news for consumers who are being treated to an early Christmas present with a combination of good deflation amid higher wage pressures.
Latest Pound/Euro Exchange Rates
  | Live: 1.1459▲ + 0.14%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1069 - 1.1115 |
**Independent Specialist | 1.1299 - 1.1344 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
However this lack of inflation is clearly also playing against those looking to make international payments with their sterling.
However, news that the trade deficit had grown to over £11bn in August demonstrates that we are still importing too much and exporting too little.
The weaker British pound will therefore be welcomed by exporters eager to boost their order books.
Although UK economy continues to perform relatively well the lack of any inflation - and indeed the return of disinflationary pressures into the price pipeline - is sure to keep MPC members firmly neutral for the time being.
And until we start seeing some upside pressures on inflation we will unlikely revisit the year's best exchange rates in GBP/EUR.
43 Year Downtrend in GBP/EUR
There are however signs that the pound sterling is starting to stabilise against the euro.
The pound will find significant support at the 1.3361 zone which has historical significance in that it halted declines in May.
Further support levels will question the euro’s strength at 1.3261.
Commerzbank’s Karen Jones says this is the location of the previous 43 year downtrend which should now act as support to the 2013-2015 uptrend.
Euro on a Tear Higher as GBP and USD Struggle
There is no stopping the euro it seems. Interestingly, it appears that the euro's gains have come largely courtesy of the weakness in the pound and dollar as Eurozone data has been relatively poor and German bund yields continue to decline.
Eurozone industrial production dropped 0.5% in the month of August.
"While this decline was right in line with estimates it doesn't diminish the fact that manufacturing activity received zero support from a weaker currency and lower energy prices. The strength of EUR/USD clearly comes from the weakness of the greenback and a short squeeze in the currency pair," comments Kathy Lien, Managing Director at BK Asset Management.
Lien forecasts that if EUR/USD closes above the May high of 1.1467, 1.1500 becomes the main level of resistance.
"However the higher the euro rises, the more problems it creates for Europe's economy and the greater the pressure it puts on the ECB to ease again," says the analyst.
