Pound / Euro Exchange Rate Forecast to Recover to Above 1.30 by Soc Gen, 1.2626 Support Being Tested on Monday
The GBP to EUR exchange rate is trading softer on Monday, towards key support at 1.2626, but Societe Generale have told clients the pound should edge back above 1.30 by the end of the year.
“Our core strategy will be to sell GBP against the EUR and USD on any post-referendum bounce" - Kit Juckets @ Societe Generale.
Pound is trending lower against the euro at the head of the new week with global markets showing a clear aversion to risk.
In the short-term we watch to see how support at 1.2626 plays out. As noted further down in this piece, this support level has proven incredibly popular for the GBP/EUR in 2016.
That said, markets sentiment towards the UK currency remains poor and the market is illiquid which suggests there may not be the kind of buying interest at impending support levels that would have been there in the past.
Those with currency requirements who can afford to wait should look beyond June 23rd and position for a stronger GBP/EUR exchange rate by the time the year turns.
A recovery is coming say analysts at sSociete Generale who have released their foreign exchange forecasts for the second half of 2016.
The note does however caution that those hoping for a powerful rally following a Remain victory in the referendum (odds show a 70% chance the UK will vote to remain) will be very disappointed.
This theme has been echoed here (it is suggested there is actually very little potential upside in GBP/USD on a Remain vote).
By the end of 2016 the pound to euro exchange rate is forecast to trade at 1.3158, but this is actually the best rate we are likely to see with analysts forecasting the pair to slip to 1.2987 by March 2017.
By June 2017 the rate will actually be lower at 1.2820.
“Our core strategy will be to sell GBP against the EUR and USD on any post-referendum bounce, assuming we see a ‘remain’ outcome that takes the EUR/USD and GBP/USD higher,” says Kit Juckes, analyst with Societe Generale in London.
Juckes and his team have been studying sterling's relationship with interest rate differentials - sterling tracks interest rates closely and it appears that sterling is already overvalued on this front.
The GBP/USD particularly so:
And what happens if Brexit occurs?
"On a UK ‘Exit’ we are likely to see GBP/USD test 1.25 this year, and indeed, the EUR/USD could fall sharply too (to 1.05?). That would take EUR/GBP towards 0.85," says Juckes.
So while there is some strength ahead those with payments should note that the kind of 1.40+ levels witnessed in 2015 are unlikely to be attained.
ING, Danske Bank Forecasting Weakness Towards 1.25, 1.1 on Brexit
Momentum is forecast to be pitted against sterling over the near-term with ING analyst Petr Krpata telling us that a target he is eyeing is 1.25 in coming weeks.
Predictably, the EU referendum will be the engine behind declines, according to Krpata:
“We expect Brexit risks to dominate GBP price action in the run-up to the referendum, especially as it becomes increasingly apparent that the outcome will be close (Figure 4 shows a timeline of key events). We prefer see GBP underperforming USD and JPY and EUR/GBP ticking up to 0.80 over the coming weeks.”
1 euro = 0.80 pounds is the equivalent of 1 pound = 1.25 euro.
Danske Bank have meanwhile told clients ahead of the new week in FX that “there is a substantial digital risk in particular in EUR/GBP and UK equities.”
The range for GBP/EUR is 1.3158 in 3M in case of a Bremain, which is our official FX forecast, and 1.11 in case of a Brexit. As such, the risks are heavily skewed towards a weaker GBP into the UK’s EU referendum.
“We also want to stress our asymmetric market views, which we believe will hold both in case of a Brexit and a Bremain,” says the note.
Latest Pound/Euro Exchange Rates
  | Live: 1.1449▲ + 0.05%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.106 - 1.1106 |
**Independent Specialist | 1.1289 - 1.1335 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
GBP/EUR Technically Breaking Down
Developments in the short-term will determine whether sterling officially enters a medium-term technical downtrend against the euro in the coming week should a key level on the charts give way.
Technical analysts are viewing the outcome of a test of the 1.2626 fulcrum for guidance as to further direction.
This level is key as it has historically proven to be a solid point of buying interest for sterling with traders willing to back a recovery from the level:
Note the congestion at this point, observed in early May, we would expect any declines suffered at the start of this week to find support at this point.
Why this is the case is unclear - a market is made up of thousands of traders, whose motivations are impossible to discern. However, he beauty of charting is that it betrays intent and becomes a self-fulfilling force as many others will be viewing the level with the same idea.
Note though that many will be watching for a failure of 1.2626 as a signal that they can profit on a rapid fall if it fails. A good portion of the market is expected to be committed to levels surrounding 1.2626, therefore there is clear air below here.
GBP/USD at 1.30 and Below on Brexit
With polls showing a notable swing to Brexit over recent weeks the outcome of the impending vote looks less assured than it was through the course of May, when we saw GBP rise notably.
Expect the British pound to fall to 1.30 against the dollar on a Leave victory say ING who warn not enough Brexit risk premia is priced into GBP spot, meaning that the scope for a GBP/USD decline is meaningful should the UK vote to leave the EU.
This should be the case even if EUR/USD does not fall meaningfully.
ING go on to say that In the remote case of the severe EMU crisis (which may actually benefit GBP against EUR, as was the case in 2010-2012 EMU crisis), the panic EUR/USD fall would likely outweigh relative safe haven GBP strength against EUR (as in the these circumstances the UK leaving the EU would no longer matter so much).
Hence, GBP/USD is forecast to fall below 1.30.
FOMC is Market’s Headline Risk This Week, Watch the Dots!
Markets will be watching the US Federal Reserve in the coming week to figure out whether the Fed is looking to raise interest rates anytime soon.
The outcome will impact direction in the world’s largest currency, therefore influencing major pairs like GBP/USD and EUR/USD through to the price of commodities and movements in stock markets.
This is key for sterling as we have noticed of late that the UK currency appears increasingly sensitive to the mood of global investors.
The OIS curve prices in just a 3.3% probability of a 25bp rate hike and most analysts we have heard from certainly don’t expect one.
“The focus for markets will be on the message the FOMC sends about its future intentions, and in particular whether there are any strong hints of a policy tightening at either of the next two policy meetings in July and September,” says Rhys Herbert at Lloyds Bank’s Commercial Banking unit.
While they will probably stop short of emphatically signalling a move at either meeting, Lloyds expect the FOMC to hint that rates are likely to rise in the near future. We forecast two rate rises of 0.25% this year, in September and December.
In addition to the normal Statement, this meeting will also include a press conference and the release of an updated Summary of Economic Projections (SOER) with its
associated ‘dot’ matrix.
Yellen just spoke on Monday, including a Q&A session.
"We find it highly unlikely that she deviates in any meaningful way from that speech," says Greg Anderson at BMO Capital Markets. "The Statement will need significant updates to its description of the economy given recent data, but it is likely to describe those updates in a balanced way and remain noncommittal"
The May payrolls number makes hawkish dissenters unlikely.
Therefore, suggests Anderson, the intrigue of the meeting boils down to the Summary of Economic Projections and the dots in particular.
