GBP/EUR Exchange Rate Slides Ahead of Autumn Statement but Forecasters Remain Bullish
- Written by: Gary Howes
Pound Sterling has shrunk in value in the run-up to the Autumn Statement but analysts say it is still too early to call an end to the short-term recovery rally we have seen over recent weeks. But how high can GBP/EUR go?
- Pound to Euro Rate Today (22-11-16): 1.1694, 24-hour best: 1.1780, 24-hour low: 1.1575
- Euro to Pound Sterling Rate: 0.8551, 24-hour best: 0.8639, 24-hour low: 0.8488
GBP is seen struggling ahead of Wednesday's Autumn statement as traders pare back exposure to the currency in the event of another politically-inspired bombshell being dropped.
Sterling has gone from hero to zero in the short space of 24 hours having been the G10's best performer on the 21st November to the club's worst performer on Tuesday, November 22:
GBP outperformed its rivals at the start of the new week following comments made by the UK's Prime Minister that a transitionary period is being mooted for businesses to adapt to Brexit.
The idea is that there would be some Norwegian-style period that sees the UK comply with EU laws in order to maintain full access to the single market ahead of a complete withdrawal.
Whatever the case, the Pound found favour against its continental peer and extended its multi-week rally.
“The UK currency gained ground against the Euro for the third week in a row as market participants took the view that Sterling was far more likely to track the Dollar than the single currency in the coming months,” says Bill McNamara at Charles Stanley, the London-based broker.
The Bank of England has also made it clear that the current economic situation does not merit additional rate cuts or further quantitative easing which would be supportive to Sterling as reduced demand for UK bonds by the Bank would in turn push interest rate yields higher.
As we have seen of late, Sterling benefits when yields are rising.
Kit Juckes at Societe Generale explains that GBP is now more about US rates than UK ones, and this could keep it supported near-term:
"UK rate expectations can’t really fall much further. If rising US yields drive the EUR/USD down, that will be felt in the GBP/USD with the EUR/GBP drifting lower. The UK economy faces headwinds next year, but it needs to face much more than that for a fresh round of independent GBP selling."
A steady Bank of England contrasts to expectations for an announcement by the European Central Bank that it will extend the lifetime of its own quantitative easing programme which will in turn likely keep Eurozone yields suppressed.
This divergence in policy has favoured Sterling of late, and could keep it supported going forward.
“Over the last three weeks the Pound has risen by more than 5% versus the Euro, one consequence of which is that it has broken out above its short-term downtrend; this sharp advance has left it looking short-term overbought, but the overall impression is that it could have further to go before the rally runs out of steam,” says McNamara.
McNamara sees the next area of possible resistance at around 1.19, which was September’s intermediate high.
Latest Pound/Euro Exchange Rates
  | Live: 1.1446▲ + 0.03%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1057 - 1.1103 |
**Independent Specialist | 1.1286 - 1.1332 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Pound Forecasts Upgraded
The improved tenor to Sterling seen since October has seen lead to further institutional analysts to upgrade their projections on the currency.
The latest move comes from DNB Bank ASA - a forecaster that we note has had some good form in calling GBP direction in the recent past.
DNB have written to clients saying they no longer believe the Bank of England will cut rates and extend quantitative easing whereas previously it was considered that this could be the case in 2017.
The result is a stronger Pound near-term.
"We expect to see further GBP appreciation in the short run, as data still resilient to Brexit and US Presidential election improves UK hand in negotiations," say DNB Bank in a forecast update to clients released on November 21.
DNB believe Brexit and US Presidential election improves UK hand in negotiations, but uncertainty will resurface with Brexit negotiations and new trade arrangements.
Furthermore, analysts see the need for further GBP weakness if foreigners are to continue funding the the UK's massive current account deficit.
Because the UK imports more than it exports it relies heavily on foreign investor inflows to keep Sterling propped up. As Sterling falls it makes the UK a more desirable destination for capital purely on a cost-benefit basis as UK assets become cheaper.
This in turn supports Sterling from further downside. Until confidence in the UK's outlook is fully restored expect the current account deficit to be a lingering source of weakness for the currency.
As such, DNB Bank keep their longer-term forecast for GBPEUR in 12m unchanged at 1.0869, but see room for more GBP strength in the short-term.
The one-month forecast is revised up to 1.19 while the three-month forecast is raised to 1.1628.
So while volatiltiy remains high it is still too early to call an end to the recovery bounce.
