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Collated Forecasts for the Pound / Euro Exchange Rate from Major Institutions

GBP to EUR outcomes

The economic backdrop that underpins the pound has changed fundamentally since the UK decided to exit the European Union and foreign exchange analysts have had to scrap previous assumptions on where the pound will trade over coming months.

The default setting for the majority of investment banks was that the UK would vote to Remain a member of the EU, this saw many forecasters pricing in a stronger pound heading into the end of the year.

Driving this strength was the assumption that the Bank of England would be willing to raise interest rates, a move that would attract increasing foreign exchange inflows as global investors seek superior yield.

Brexit brings a fear that UK companies are delaying and even scrapping investment decisions as months of uncertainty lie ahead.

As such, assumptions are growing that the Bank of England will now actually cut interest rates.

This has seen analysts price in a lower GBP/EUR on the Brexit outcome:

Pound to euro outcomes

Above: Outcomes for GBP/EUR, image courtesy of Investec.

A Range From Parity to 1.20: The New Reality

Gone are the days of forecasting the sterling-euro exchange rate back and above the 1.44 best seen in 2015.

Now we note leading institutional forecasters see the exchange rate trading anywhere from parity to 1.20.

Parity is a forecast by UBS based on the observation that Brexit would bring into stark contrast the UK's trade deficit with the rest of the world.

HSBC have also warned that parity is an option.

The UK is a net importer and therefore would naturally have a weaker currency as the country demands more foreign exchange than its trading partners demand Sterling.

The equation is however offset by a huge demand by international investors seeking to take advantage of a host of UK investments, ensuring Sterling trades at the levels we have so been accustomed to of late.

Latest Pound/Euro Exchange Rates

United-Kingdom European-sUnion
Live:

1.1551▲ + 0.03%

12 Month Best:

1.1803

*Your Bank's Retail Rate

 

1.1158 - 1.1204

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

What happens if those investor inflows slow down? The pound goes down.

Goldman Sachs say their new forecast for EUR/GBP is 0.85, 0.82 and 0.78 in 3, 6 and 12 months (from 0.76, 0.74 and 0.70 before), reflecting a weaker outlook for Sterling over the coming year.

EUR/GBP at 0.85 = GBP/EUR at 1.1765, 0.82 = 1.22, 0.78 = 1.28.

Interestingly, in the medium term, "we think the Pound regains some strength, with EUR/GBP falling to 0.70 on a 24-month horizon (versus 0.65 in our previous forecasts) and then to 0.65 on a three-year horizon (unchanged from before)."

0.70 EUR/GBP = 1.4286, 0.65 = 1.54.

UniCredit Forecast 1.10

Not included in the above matrix are similar forecasts released by UniCredit Bank which also sees GBP/EUR settling towards 1.10.

UniCredit have estimated that portfolio flow reversals would send EUR-GBP to 0.90 and result in sustained GBP-USD weakness to between 1.25 and 1.30.

A euro to pound sterling exchange rate at 0.90 equates to a pound to euro exchange rate at 1.11.

UniCredit’s Erik Nielsen says:

“Uncertainty is bad for business, a sharp fall in UK risky asset prices, delays to investment, disruption to trade, and a loss of business and consumer confidence mean the UK economy is more likely than not to enter a technical recession within two years. We will now slash our UK 2017 GDP forecast to around zero (from 2.1%).”

He further adds that his already quite bearish forecasts for the pound may be overly conservative:

“In fact, we regard these as conservative estimates given the acceleration of short bets in the pound, potential easing by the BoE, an upcoming UK recession and some (at least partial) reversal of Foreign Direct Investment.

UniCredit have estimated that portfolio flow reversal would send EUR-GBP to 0.90 and result in sustained GBP-USD weakness to between 1.25 and 1.30.

A euro to pound sterling exchange rate at 0.90 equates to a pound to euro exchange rate at 1.11.

Sell Sterling Stability

The vote to leave the EU has already and unsurprisingly prompted a significant market reaction, with the USD and JPY strengthening significantly, and GBP and EM currencies weakening substantially.

While the risk of a policy response at multiple levels to stabilise markets is high, and has already led to a modest reversal of early losses, analysts at Morgan Stanley have written to clients saying they believe stability will prove fleeting.

"The medium-term implications for growth, cross-border capital flows and risk taking more broadly mean that we are likely to see further USD and JPY strength and GBP, EM and commodity market weakness. As such, we would recommend fading any near-term stabilisation efforts," say Morgan Stanley.

Kathy Lien, Director of BK Asset Management agrees with this strategy noting Brexit deals a major blow to investor, business and consumer confidence and in the coming months, all 3 will refrain from making major investments.

"The prospect for the U.K. is grim and for this reason and therefore all rallies should be viewed as selling opportunities," says Lien.

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