GBP/EUR and the Magic 1.44: Carney and Osborne Play Tug-of-War
"Once the market has re-based a foray toward 1.4600 and thereafter 1.4725 looks plausible as this up-leg continues." - Associated Foreign Exchange.
Can the British pound to euro pair reach its best exchange rate just above 1.44 again in 2015?
We consider the two recent events that are pulling on either side of sterling.
George Osborne: 1.44 Back in Sight
Those hoping for a stronger sterling have the Chancellor of the Exchequer George Osborne to thank for the strong recovery seen in the exchange rate complex.
The pound is back above the 1.42 marker against the euro as markets were told that spending cuts in the UK will be less harsh than initially expected while GDP forecasts for 2016 are revised higher.
The 2015/2016 budget deficit was revised lower to 73.5BN, from July's forecast of 74.1 BN. Markets had predicted Osborne would today announce a 74.4BN deficit.
We would suggest a near-term bottom has been reached.
Latest Pound/Euro Exchange Rates
  | Live: 1.1448▲ + 0.04%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1059 - 1.1105 |
**Independent Specialist | 1.1288 - 1.1334 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Risk manager Lucy Lillicrap from Associated Foreign Exchange is bullish saying some of the weakness we have seen of late is viewed as corrective from a long term perspective any fresh set-back is again likely to prove unsustainable:
"Support begins at 1.4190/00 and studies argue an extension through 1.4050 secondary demand would be necessary to signal an interim top has been posted already.
"Otherwise once the market has re-based a foray toward 1.4600 and thereafter 1.4725 looks plausible as this up-leg continues."
Mark Carney: Bank of England Works to Cap Gains
On Tuesday the 24th of November the prospect of 1.44 being broken and held was dealt a severe blow when markets got the hint that the Bank of England is not looking to raise interest rates for many months yet.
On the 17th of July the GBP to EUR conversion reached 1.4416 and much of November has been spent obsessing as to whether or not the retail markets would deliver these levels again.
Indeed, we had been expecting this rate of late noting that many euro forecasts see the GBP/EUR exchange rate rising towards 1.45 before the end of 2015.
The move lower in the pound exchange rate complex serves to remind us that for sterling the Bank of England’s stance on interest rates remains the single most important factor.
In turn, decision-making at the Bank of England will focus primarily on inflation data over coming months.
We had seen the Bank switch to other determinants such as employment and wage growth at the start of the year but inflation has fallen to such an extent that these data points have been consigned to secondary importance.
“There have been plenty of external headwinds that have kept the near term inflationary pressure subdued, giving sufficient headroom to the MPC before it embarks upon the route of tighter monetary policy,” comments Vatsala Datta, UK Rates Strategist with RBC Capital Markets.
This position is justified after all as the Bank’s mandate is to keep inflation at around 2% over the long-term and Governor Carney and his team appear happy to simplify their agenda and sit tight on rates until prices move higher.
With that in mind, it is worth noting that analysts at UniCredit Bank in Milan warn that the Bank could get a rude surprise in 2016 as inflation makes a comeback.
“As we move into 2016 and the negative base effects in headline inflation fade, inflation will pick up sharply. Wage growth effects will then start to surface, setting the stage for an earlier BoE lift-off than is currently priced in,” says Dr. Vasileios Gkionakis Head of Global FX Strategy at UniCredit.
UniCredit do however warn that should oil prices plummet further the prospect of higher inflation will remain as low as ever.
Nevertheless, this assumption is a decent straw to grasp if you are awaiting a better pound to euro conversion rate.
Until then, we would suggest you stay in touch with your broker and lock-in current levels while leaving a further portion of your money available to transact when higher levels are hit.
