GBP/EUR Trending Lower, But 3-6 Month Timeframe is Kinder
- Written by: Gary Howes
The British pound is under pressure with studies suggesting a decline back towards the 1.33 support level again. However, the 3-6 month picture for sterling is more positive it is argued.
I reported this week that some strategists in the market are forecasting the pound to euro exchange rate to head back into the early 1.30’s - the area which represents the bottom of the monthly range held since the start of 2015.
I also suggested at the initial publication date of the article that, "based on the amount of evidence coming our way that it is an outside view at this stage."
I now believe the 1.33 target is looking more realistic having witnessed the pound's inability to find buyers which suggests the downtrend is likely to remain the path of least resistance.
As we can see, indicators are mixed but a break below the 100 moving averge will certainly build the case for further declines:
3-6 Month TImeframe Looking More Positive
I am prone to a downside bias in the near-term based on the clear lack of fundamental and technical support faced by sterling.
Yet, longer-term timeframes remain tilted to an extension of the multi-year uptrend.
New forecasts from Societe Generale echoe the view that we suspect is most likely to play out - the pound and euro will hang around present levels for some time yet before the pound sterling puts in one final flourish.
The French bank forecast the EUR/GBP to reach 0.71 in March, 0.68 in June, 0.70 in September and 0.69 by the end of 2016.
Turning the equation around this equates to 1.4085 GBP to EUR in March, 1.4706 in June, 1.4286 in September and a close to the year at 1.4493.
Our collated forecasts for the EURGBP see the exchange rate at 0.69 in March, 0.6933 in in June, 0.70 in September and 0.7046 in December 2016.
Note, all exchange rate quotes in this piece are taken from the inter-bank markets, your bank will then add a discretionary spread to the rate they offer you. However, an independent provider will guarantee to undercut your banks offer, thereby delivering up to 5% more FX for transfers.
Bank of England: Becoming More GBP Friendly Say ING
The main driver for future direction in the British pound will of course be the Bank of England which I believe will become more pro-GBP towards mid-2016 all things being equal.
The Bank has been aggressively intent on selling the message to markets that no change in interest rate settings are to be expected anytime soon.
It is this message that has ultimately capped sterling strength against the euro.
Ahead of the December decision meeting ING’s James Knightley says BoE caution over GBP strength may be exaggerated; “wage inflation to pave the way for a more GBP-friendly MPC.”
Knightley believes the Bank have engineered sterling’s recent weakness in late summer after observing weakness in manufacturing data and concern that a sharp rise in UK rate hike expectations would lead to excessive GBP strength.
A stronger pound would see the cost of importing into the UK fall and thus keep prices lower for longer.
This is problematic for a Bank that is primarily tasked with keeping inflation levels at the 2% target.
The MPC suggested last month that “more likely than not inflation would remain below 1% into the second half of 2016”, while the effects of GBP strength and weakness in energy prices would “diminish only gradually”.
However, the less aggressive than anticipated response from the ECB last Thursday has helped contribute to a 2% decline in the GBP nominal trade-weighted index, of which the EUR accounts for nearly half.
A Rapid Rise in GBP Ahead?
The domestic economic story remains strong; 177k jobs were created in the three months to September, unemployment is down to 5.3%, wages are rising, confidence is high, house prices are rising rapidly and the service and retail sectors are in good health.
“Consequently, we still feel that the BoE is gradually edging towards a rate rise, but is doing all it can to prevent a rapid rise in GBP,” says Knightley.
The ING core view remains that the next move in interest rates will be in May 2016, but that no-one will join Ian McCafferty in voting for an immediate rate rise this Thursday.
"We predict the former will serve as a catalyst for both a hawkish re-pricing of the BoE story and a near-term window of opportunity for GBP strength. Fade any GBP weakness over the coming days and instead look to sell EUR/GBP ahead of next week’s more constructive UK inflation data," says Knightley.
For more on ING's view concerning the dynamics between the Bank of England, sterling and inflation please see more coverage here.
