British GBP/EUR Exchange Rate Forecast to Bottom at 1.08 by Danske's Helt

Morten Helt at Danske Bank has upgraded his Pound Sterling forecast targets following recent economic resillience. However, these targets remain below present levels suggesting the decline in the UK currency is far from over.

• Pound to Euro exchange rate today: 1.1556, September's best rate: 1.1999
• Euro to Pound Sterling exchange rate today: 0.8663, September's best rate: 0.8631

GBP continues to struggle on foreign exchange markets having been confirmed as the worst-performing currency in the G10 complex for the week 19-23 September.

The under-performance has taken the the currency back to August 2016 lows and on momentum alone we would expect a break to fresh 2016 lows within days.

Such a move would be consistent with expectations held by analysts at Copenhagen’s Danske Bank - a major European lender.

Danske have told clients that they have responded to better-than-forecast economic data releases out of the UK economy by notching up their GBP/EUR projections.

This move is similar to that enacted by Dutch peer ABN Amro, as reported earlier this week.

There is a difference between the two upgrades though.

Where ABN Amro see Sterling ending the year higher than at current levels, Danske Bank anticipate deeper declines and therefore still maintain a negative stance on the UK currency.

Analysts at Danske note that economic surveys suggest that the UK rebounded in August after the initial deceleration in July, suggesting that the UK economy may avoid a Brexit recession.

PMIs have rebounded sharply across sectors: the NIESR GDP estimate has been positive and consumer confidence is still at a relatively high level.

“As the economic data has been better than expected, we now expect quarterly GDP growth to stay positive during H2 16, i.e. we no longer expect a Brexit recession although the probability of a recession is still relatively high,” says Morten Helt, Senior Analyst, at Danske Bank Markets.

However, the economy is still expected to slow markedly versus pre-referendum growth rates due to Brexit uncertainty, a view that is maintained by a number of esteemed economists, even those who rubbished claims that the UK economy would crack open after the Brexit vote.

Latest Pound/Euro Exchange Rates

	Live: 1.146▲ + 0.15% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.107 - 1.1116
**Independent Specialist	1.13 - 1.1345 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Fair Value Estimates Suggest the Pound Should be Higher

As a result of the data flow, Danske’s proprietary fair-value models suggest the Pound is now undervalued against the Euro.

EUR/GBP is trading above the fair value estimates implied by the bank’s PPP model (0.77) and their MEVA model (0.755).

This would suggest the GBP/EUR should be at 1.2987 according to the PPP model and 1.3245 on the MEVA model.

However, we have noted time and again that currencies can take protracted periods of time on their journey to fair-value, and it could be years before GBP/EUR hits its fair-value target again.

November Interest Rate Cut at Bank of England to Weight on Sterling

Despite observing they may have been too negative on Sterling based on subsequent economic reality, Danske Bank warn that growth will slow and the Pound will fall.

“Uncertainty about the future relationship between the UK and EU after the Brexit vote has increased uncertainty about near-term FDI and portfolio flows into the UK, which along with the large current account deficit in the UK, implies a significant risk to GBP,” says Helt.

And, further action at the Bank of England Bank of England (BoE) is likely to keep the UK unit under pressure.

At its September policy meeting the Bank left the door ajar to further easing later this year if data meets expectations from August projections.

However, the BoE signals that the probability has declined, as near-term indicators have been better than expected.

Danske Bank Markets nevertheless still expect a 15bp rate cut from 0.25% to 0.10% in November but it is a close call and will depend largely on how data comes out.

“There is only a 5bp BoE rate cut priced in for November; therefore, we think markets are too complacent about the probability of further easing,” says Helt.

Politics Poses Notable Downside Risks

Politics are another issue Danske have taken into consideration while callibrating their expectations for Sterling.

Political uncertainty has declined significantly after the crowning of Theresa May as new Prime Minister.

Nevertheless, May has said that ‘Brexit means Brexit’ but that she will not trigger Article 50 before yearend at the earliest due to preparations. Early 17 seems more likely in Danske's view.

Recent comments from EU and UK leaders/ministers/officials suggest that the forthcoming negotiations will be tough.

Although a deal is never sealed until just before deadline, Danske cannot rule out a ‘hard Brexit’ scenario.

"So, overall, political uncertainty has declined for now but is lurking beneath the surface. Brexit uncertainty could hit sentiment, growth and financial markets again when Article 50 is triggered," says Helt.

We got a taste of how this uncertainty will undermine Sterling on Friday the 23rd September when the currency lurched towards 2016 lows on comments by Boris Johnson, the UK's Foreign Secretary, that Brexit negotiations could start in January.

This is sooner than markets had anticipated and goes to show just how uncertainty over the whole process can deliver outsized moves in the currency.

More of the same and Sterling will quickly paint fresh multi-year lows.

The Upgraded Forecast Targets for GBP Against the Euro

Danske Bank forecast of a weaker GBP is driven not only by BoE easing but also by the considerable imbalances in the UK economy, not least the significant current account deficit.

In addition, net foreign debt accumulated through several years of current account deficits has made the GBP very fragile.

The political uncertainty has declined for now but Danske warn it is lurking beneath the surface and will weigh on GBP when Article 50 is triggered.

While data suggests that the UK may avoid recession in H2 16, as mentioned, Danske still expect the BoE to cut the Bank Rate by 15bp from 0.25% to 0.10% in November.

The likelihood of more QE is low, however, and given the stronger-than-expected economic development post the UK’s EU referendum, Danske Bank have revised their 1-6M EUR/GBP forecast slightly lower to 0.87 (from 0.88 previously) in 1M, 0.88 (from 0.90) in 3M and 0.92 (from 0.95) in 6M.

IN GBP/EUR terms this equates to 1.1494 from 1.1364, 1.1364 from 1.1111 in three months and 1.0869 from 1.0526.