British GBP/EUR Rate Forecast to Recover to 1.33 by Time of EU Referendum say Lloyds

The latest set exchange rate forecasts from Lloyds Bank see a gradual a recovery in the pound to euro exchange rate into, and after, the EU referendum.

• Pound trading in volatile fashion on Thursday owing to the ECB's interest rate cut and subsequent press conference
• Exchange rate remains in its range of 1.2850 to 1.30
• Lloyds back sterling to strengthen into EU referendum but push back first Bank of England interest rate rise to November 2016

The British pound is undervalued against the euro suggest analysts at Lloyds Bank who are forecasting a steady recovery to 1.33 by the time of the EU referendum.

The forecast chimes with the consensus view held at the leading 45 institutional researchers who forecast the rate to rise to 1.3532 in 6 months time.

While the pound to euro exchange rate has bounced up from its February low of 1.26 but has struggled to break above 1.30 in early March.

Despite the inability to break above what is clearly a significant support/resistance zone, “the recent move higher suggests a base may have been found near the 1.26 level,” say Lloyds.

Latest Pound/Euro Exchange Rates

	Live: 1.1391▼ -0.13% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1004 - 1.1049
**Independent Specialist	1.1232 - 1.1277 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

For the pair’s outlook, while Brexit and Bank of England interest rate expectations are important, Lloyds reckon the European Central Bank could prove to be a major headache for the euro.

“Looking ahead, we expect UK policy rate uncertainty and EU referendum risks to be overshadowed by additional ECB stimulus in March. This should ultimately push GBP/EUR modestly higher through year end,” say Lloyds.

The risks to the Lloyds short-term forecast, however, remain skewed to the downside given EUR resilience over recent week despite expectations of more QE from the ECB.

“Our long-term fair value estimate for GBP/EUR ranges between 1.25-1.27. We forecast GBP/EUR to end 2017 at 1.32,” say Lloyds.

No Interest Rate Cut Likely at the Bank of England Until 2017

Since the start of the year a deterioration in investor confidence and heightened concerns over the outlook for the global economy have led to a significant scaling back in UK interest rate expectations which have seen softer demand for the pound.

Rising anxieties around emerging markets, particularly China, were reflected in downward revisions in the Bank of England’s collective assessment of global growth prospects in the February Inflation Report.

The outcome of the EU referendum have also contributed to a marked shift in UK rate sentiment.

"In fact, there has been some mention of the Bank of England cutting interest rates. Although this cannot be ruled out, we believe this would require a significant deterioration in the economic and financial market outlook from here, which we do not foresee," say Lloyds.

Nevertheless, analysts at the bank have pushed out their forecast for the first rise in UK Bank Rate to November 2017.

ECB Unable to Break Tight Range in GBP/EUR

Recent price action in the pound to euro exchange rate has been dour, at best.

We were hoping the ECB's March policy decision and the press conference that followed would see the pound break out of its recent ranges, however this looks unlikely with an initial rally soon fading.

The GBP broke through the 1.30 resistance level only to fall sharply as markets realised there is not likely to be any further agressive interest rate cuts in 2016.

The beast that is the marketplace needs to be continually fed, and Draghi refused to offer more.

We would expect the 1.28-1.2850 to offer support in the near-term now.