Euro to Pound Conversion Downside to Extend say Merrill Lynch
Investors are biased to selling euros ahead of Thursday's European Central Bank meeting on the fear that Mario Draghi could say or do something that would be consistent with easier monetary policy.
The euro has come under pressure once more as the September/October recovery rally runs into resistance. Forecasters at Bank of America Merrill Lynch see further declines ahead.
"The EUR is likely to stay under pressure with EURGBP also selling off hard from range highs around .7500. Resistance lies in the EURUSD around 1.1425/55 and around .7390/.7425 in EURGBP," note Lloyds Bank at the start of the new week in global FX.
It has been a challenging few months for sterling; the currency has fallen from a best exchange rate of 1.4416 on the 17th of July to reach lows around 1.34.
The declines come in the face of a multi-year period of appreciation for the pound to euro conversion. This broader trend is more established and stronger. Thus, we look for it to restart and view any declines as counter-trend corrections.
Expressing this view are Bank of America Merrill Lynch who have told clients they are looking to trade a recovery in the pound through entering a short EUR/GBP option.
Kamal Sharma at BofA Merrill Lynch says levels in EUR/GBP are looking increasingly attractive to establish medium-term shorts based on our policy divergence framework and given relatively light positioning in the pair:
“We would look to express this view via options strategies rather through spot as the path toward our year-end forecast of 0.71 is unlikely to be a straight one.
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.
“Our European economists still look for action by the ECB before the end of the year and, in our view, the UK rates market has pushed back rate hikes too far into 2016 than UK domestic fundamentals would justify.”
It is also noted that speculative positioning on global foreign exchange markets is supportive of further declines in the EURGBP.
BofA Merrill Lynch use the difference between net EUR and GBP positioning as a proxy for EUR/GBP positioning. Studies suggest the policy divergence positioning that was built up through 2H14 has been largely unwound.
“Our proxy would suggest that while the speculative community is still short EUR/GBP it is not on the scale of 1Q15,” says Sharma.
Bank of America are forecasting the euro to pound sterling exchange rate to trade at 0.71 in December 2015.
This level falls to 0.69 in March 2016 where it will trend through the course of the year.
A further decline to 0.68 is forecast by December 2016.
With regards to the euro v dollar exchange rate, EURUSD is noted at 1.05 in December 2015, a fall to parity is forecast at in March 2016. Parity is forecast to dominate the remainder of 2016.
