GBP/EUR Exchange Rate Forecasts in 3, 6 and 12 Months from BMO Capital

BMO Capital have issued their latest foreign exchange forecasts which confirm the GBP to EUR exchange rate will return to levels above 1.30 once again.

• British Pound to Euro rate today: 1 GBP = 1.1895 EUR, 0.12% higher than seen at the previous day's close
• Euro to Pound Sterling rate today: 1 EUR = 0.8406 GBP

The UK currency continues to move sideways, in an attempt to form a floor to the post-referendum fallout which is seeing those with money transfer requirements being offered rates as low as €1.14 by some providers. 

I am sure those with impending Pound into Euro foreign exchange payments will be wondering when they will next see levels above 1.40 again.

However, many of those who have contacted our editorial desk appear to be more focussed on a return to 1.30 and above.

In seeking to answer the question as to when 1.30+ will become available again we are able to bring readers the latest views held at BMO Capital.

Analysts at the Canadian bank have told clients that they expect the British Pound to remain pressured by the 'Brexit premium' - the discount to ‘fair value’ levels as dictated by the UK’s vote to exit the European Union.

“Although the weaker GBP will assist the UK’s external adjustment, Brexit uncertainty will reduce foreign investor enthusiasm for UK assets for now,” says a foreign exchange forecast briefing from BMO Capital.

Latest Pound/Euro Exchange Rates

	Live: 1.1445▲ + 0.02% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1056 - 1.1102
**Independent Specialist	1.1285 - 1.1331 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Analysts at the Canada-domiciled bank note that expectations for Bank of England easing have weighed on GBP but they have also prevented aggressive capital flight from UK debt markets.

There is also a political consideration BMO Capital want foreign exchange investors to consider: The new cabinet contains 16 pro-Remain ministers (including PM May) and 7 pro-Brexit ministers.

“The extremes from within each camp will need to moderate their stances so the PM can push a centrist approach to Brexit. We believe this will happen as the extremes within each camp realise that “pie in the sky ambitions” are unrealistic,” say BMO Capital’s Stephen Gallo in London.

Gallo believes a UK/EU deal that broadly preserves the free flow of goods & services between the two economies will start to take shape within the next 12M.

“We expect the UK to receive concessions which allow for tighter controls on the free movement of people and closer monitoring of the free movement of labour (a “British model”)” says Gallo.

Piecing together the various pieces of their analysis allows BMO Capital to forecast the Euro to Pound Sterling exchange rate to trade at 0.84 in three months, where it should stay until the start of 2017.

By March 2017 the EUR/GBP rate is seen lower at 0.79 ahead of a decline to 0.76 by mid-year 2017.

This equates, in GBP into EUR exchange rate terms, in forecast for 1.1904, 1.2658 and 1.3158 respectively.

Bank of England to Avoid Big GBP Devaluation

Arguably the biggest event on Sterling's calendar is the August Bank of England policy meeting and Inflation Forecast. 

Economists are forecasting a cut to the basic interest rate by 25 basis points, taking the rate to record-low of 0.25%. We believe Sterling is presently trading at levels consistent with such an event.

Anything more agressive would certainly produce a bout of fresh declines. Indeed, JP Morgan see Bank of England action as the trigger to a second post-referendum wave of GBP/EUR weakness and they forecast a rate of 1.12 over coming months. 

BMO Capital also look for new BoE easing in August when its latest economic forecasts are published.

"The scope of new easing will depend on the data, but we expect the BoE to avoid a sharply weaker GBP. Big currency devaluations can have contractionary implications, and about 25% of all of the UK’s goods exports have an import component," say BMO.  

UK import propensity for consumer goods (including passenger cars) is the highest since 2000.

"This puts a cap on GBP post-Brexit when the UK’s external financing is less assured, but it’s also a bargaining chip for the UK in its negotiations with the EU," says Gallo.

Euro to Trade in Familiar Territory Against the US Dollar

With regards to the world's largest foreign exchange pairing, the EUR/USD, it would appear neither the Euro nor the Dollar are likely to gain a substanital advantage.

BMO Capital expect EURUSD to trade at 1.07 in 3M and 1.10 in 12M - watching paint dry will be more exciting. 

The deadlock will be due to familiar conditions: Post-Brexit uncertainties and additional ECB easing will weigh on the EUR during risk-off, but the EUR’s funding currency status will also weigh during risk-on.

Furthermore, asset scarcity will persistently cap yields while weak investment spending weighs on corporate issuance and limited fiscal stimulus weighs on government issuance.

Politically, Italy could prove to be a major risk.

"With a state-backed bank bailout, PM Renzi undermines Brussels and the EU’s legitimacy. Without one, a private creditor bail-in strengthens Italy’s anti-establishment parties. A middle-of-theroad compromise or a fudge won’t halt Italy’s growth recession or financial sector malaise," says BMO's Gallo.

Big reforms which strengthen the single market in services, improve EU growth and raise its survivability odds are unlikely.

The Netherlands, France and Germany all head to the polls in 2017.

Sterling Big Loser Heading Into End of July

It had been a decent enough month for Sterling, but we are now witnessing positive momentum stall as we head to the end of July. 

The Pound was the only loser against the US Dollar which was undermined by a sanguine FOMC statement released on the 27th of July.

"The GBPUSD bounced lower from 1.3248 as traders sold into the knee-jerk rally on the back of a wider monetary policy divergence between the Fed and the BoE," says Ipek Ozkardeskaya at London Capital Group.

Even if the Fed isn’t in a position to act by September, higher US rates will hit the market sufficiently soon.

"It is certainly just a matter of time before the sterling slips below the 1.30 level," says Ozkardeskaya.

In the UK, the corporate agenda was very busy this morning.

A large pallet of companies announced earnings. So far, 46% of the 500 biggest UK companies have reported earnings.

Overall, sales surprised on the upside by 1.21%, and earnings beat estimates by 5.76%. Energy and miners remained at the bottom of the range due to a further squeeze in their profit margins and revenues.