GBP/EUR Forecast to Slump to 1.33

Pound sterling is in the process of losing further ground to the shared currency as the longer-term uptrend in the exchange rate looks increasingly fatigued.

The pound has recovered some lost ground against the euro at the start of the week with the exchange rate rising nearly half a percent from Friday's close to reach 1.3937 on the inter-bank markets.

However, Tuesday has seen the euro take the upper hand once more.

The retail markets are seeing banks offer rates between 1.3550 and 1.36 while independent provider RationalFX have said they are quoting much closer to the market towards 1.3770.

The euro exchange rate complex is partly rallying as a grossly overweight market was caught out by the ECB’s December policy decision ensuring those euro-negative bets have to be rinsed out of the market.

“The trouble with predicting currency movements is the currency market is dominated by speculative trading which means that when expectations, such as an aggressive new round of quantitative easing from the ECB doesn’t materialise, the speculators who have 'bet' on such an expectation, all run for the exit at the same time,” explains Charles Purdy at Smart Currency Business.

So in the short-term we would expect the euro to rally further as these dynamics play out.

Euro Forecast to Hold the Upper Hand Longer-Term

“A complacent EUR-short market got nastily burnt overnight and there will be more macro positions out there who will be nervous headed into the year end,” says Sean Lee at ForexTell hinting that traders may be too shy to chase the GBPEUR much higher.

The GBPEUR has an obvious technical target at 1.33 “and I think that is where we are headed,” says Lee.

The question as always, is how quickly are we headed there?

Latest Pound/Euro Exchange Rates

	Live: 1.1452▲ + 0.08% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1063 - 1.1108
**Independent Specialist	1.1292 - 1.1337 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

“I don’t like adding to positions on breaks, so best to sit patiently and wait for intraday dips,” says Lee.

The trader’s extended target for this pair, once the big macro stops start going off, is 1.25.

That is a gutsy forecast and only possible if the Bank of England does not raise interest rates in coming months in our view.

Professional traders aside, we are also seeing more analysts turn negative on sterling-euro into 2016.

“We don’t believe that it’s time to turn bearish sterling yet. The risk remains that the Bank of England defies markets by tightening sooner than currently anticipated, capital inflows both portfolio and M&A continue to be healthy and participation in the long GBP trade has lightened up,” says a note on the UK currency from Deutsche Bank.

Meanwhile, RBS have said that they remain positive on the British pound against the euro in 2016 but they are unsure of just how hurtful the UK's referendum on continued membership of the European Union will be to the currency.

Bank of England to Provide Little Aid to Sterling

In our view the potential for a higher British pound will likely only materialise once the Bank of England sounds a more positive tone on rate rises.

This week’s BoE should add little new information to the subject of higher interest rates.

Markets overwhelmingly expect the BoE to keep policy unchanged at its December meeting (Thursday).

"We believe the tone of the minutes is likely to remain broadly the same as that of the November meeting, highlighting uncertainty among Committee members and muted underlying inflationary pressures, which if anything are biased to the downside," say Barclays in a note to clients.

The Bank does however typically tend to lag the US Fed in raising interest rates by about 6 months, so we could well see the door opened to a more bullish BoE once the Fed has hiked rates in December.