GBP/EUR Exchange Rate Rally Built on Sand
- Written by: Gary Howes
- Pound to Euro exchange rate today (26-11-16): 1.1786
- Euro to Pound Sterling exchange rate today: 0.8488
Pound Sterling's recent rally against the Euro may be a fragile one destined to succumb to the longer-term downtrend that has characterised 2016 argue analysts at a leading investment bank.
Sterling has had the better of the Euro for two months now.
On Thursday, November 24 the GBP to EUR conversion rode above 1.18 for the first time in two months before failing as a wall of selling pressure lay in wait at these rarified heights.
Nevertheless, in the week ending November 25 GBP was the second-best performing currency in G10 after the Australian Dollar.
The Euro was by contrast the fourth-worst performer.
The question now is, of course, can the move higher continue?
“We see the GBP maintaining its near-term outperformance,” argue foreign exchange strategists at Morgan Stanley in a briefing to clients following the UK's Autumn Statement which saw Sterling bounce on a mixture of productivity-boosting spending pledges.
“The market is short GBP, so any rises in the gilt yield on larger expected government borrowing may help GBP too. Generally, GBP has become sensitive to bond curve steepness, helping to explain why it has outperformed in the broad USD rally,” says Morgan Stanley’s Sheena Shah.
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.
Recovering from Hard-Brexit Concerns
While bullish near-term, analysts at the US-based investment bank say the main risk to Pound Sterling’s rally is the return of the hard-Brexit theme.
The Pound fell sharply at the start of October when the Conservative Party conference saw the Government advocate for immigration controls over EU nationals.
Such controls imply the UK would have to sacrifice access to the single market; something that shook the Pound which fell to its lowest levels since 1990 on a trade-weighted basis.
The Brexit debate has however evolved since early October with markets taking a more positive view of the matter with Prime Minister May recently saying businesses need not fear a sudden “cliff edge” when the UK leaves the EU.
This was interpreted as May signalling an interim period of single market membership to soothe the way to a more robust Brexit, potentially years on the horizon.
Foreign exchange markets liked this assurance.
“The market is still short GBP so position adjustment and no new negative news from the Brexit negotiations should continue to allow GBP to rebound,” says Shah.
However, the point made by Morgan Stanley is that it would be wise to remain wary that the hard-Brexit theme could still come back to bite Sterling.
And then there was the other wildcard that aided Sterling - Donald Trump wining the US elections.
The Pound benefited as UK gilt yields rose in sympathy with their US counterparts as markets priced-in higher inflation over coming years.
UK yields rose at a pace that outstripped the rise in their Eurozone counterparts, putting upside pressure on GBP/EUR.
Pound Sterling is Still Destined Lower Longer-Term
Nevertheless, the official forecasts held by Morgan Stanley anticipate further downside in Sterling over the longer-term.
“Going into 2017, GBP may weaken again as we expect business investment to fall,” say analysts.
The call for further GBP weakness on the back of falling business investment comes as the ONS release their most recent business investment data which shows investment actually grew in the months following the decision to leave the EU.
The Euro is meanwhile expected to remain strong on the crosses, such as the EUR/GBP cross, as eurozone banks are not increasing foreign lending enough to compensate for the current account surplus.
Additionally, Morgan Stanley argue the higher global inflation environment reduces the need for the ECB to add to QE purchases indefinitely.
The EUR/GBP exchange rate is forecast at 0.98 by the end of 2017 ahead of a decline to 0.97 by the first quarter of 2017 from where it will gradually fade to 0.83 by year-end 2017.
From a Pound into Euro perspective 0.98 = 1.0204, 0.97 = 1.0309, 0.83 = 1.2048.
We would suggest that declines to 1.02 are unlikely this year owing to the October-November rebound towards 1.18 and would imagine some upgrades to the forecasts are likely going forward.
