British Pound to Edge Lower Against Euro Over Coming Months argue TD Securities

Pound to Euro forecast

Foreign exchange strategists at TD Securities have updated clients with their latest projections for the foreign exchange and fixed income markets.

Drilling down to the British Pound to Euro exchange rate’s outlook we don’t find the prospects too encouraging for those hoping for a stronger Pound with which to purchase more Euros.

Of course, this does make good reading for those looking to make a purchase of Sterling over coming months.

Analysts in TD Securities’ London branch say a slowing economy will ultimately keep a lid on Sterling’s performance going forward.

The call comes on the same day that the ONS reports UK economic growth slowed to 0.3% in the first quarter of 2017, down from a blistering 0.7% growth in the final quarter of 2016.

“The UK heads towards a June 8 election with household spending & wage growth slowing and data surprises deteriorating,” say TD Securities in a note dated April 28.

“While 1st quarter 2017 growth is likely to post another solid gain, there are risks on the horizon that will keep the BoE on pause for the duration of this year and next as it appears more and more likely that exchange rate depreciation is responsible for the surge in inflation,” warn analysts.

UK data deteriorating, should weigh on Sterling

The slowing growth profile will therefore likely impinge on the decision-making process at the Bank of England.

Recall currencies tend to appreciate as interest rates rise; and when markets sense the Bank is likely to start raising interest rates in the future the Pound should really gain some meaningful traction.

But the Bank is unlikely to budge anytime soon as TD Securities believe they will remain concerned however that high inflation is finally bearing down on consumer spending through falling real wages.

UK consumer spending to come under pressure

Understandably, politics is also expected to play a big part in their view that Sterling is likely to edge lower against its European counterpart over coming months.

“Political risks remain on the agenda as the UK heads to an early election, but these are now supportive for the GBP as Brexit negotiations get off to a (slow) start,” say TD Securities. “We think Sterling’s path will ultimately remain governed by the UK’s fundamentals.”

What the Forecasts for the Pound v Euro Look Like

TD Securities forecast the Euro to Pound exchange rate to trade at 0.86 by June, 0.86 by September and 0.88 by the end of 2017. The rate stays around here before falling to 0.87 by June 2018.

From a Pound to Euro exchange rate perspective this equates to 1.1628 by June through September and 1.1364 by year-end. A rise to 1.1628 is seen by mid-2018.

The views echo closely those held by analysts at Lloyds Bank who have this week said they believe that the Bank of England’s intransigence on raising interest rates will hang around Sterling’s next.

Analysts at the UK high-street lender reckon the Pound to Euro exchange rate is most likely to hover around 1.18 over coming months.

However, Lloyds don’t see Sterling weakening to the extend that TD Securities do.

But we also note that opinions on Sterling’s outlook differ greatly with some analysts forecasting the Pound ending the year as high as 1.30 Euros.

RationalFX bannerForecasts Upgraded

Deutsche Bank - one of the world's largest dealers in foreign exchange, have meanwhile updated their clients with updated forecasts for Sterling.

Analysts at the bank argue the reason for upgrading Sterling lies largely with the view that the political outlook for the UK has improved markedly since Theresa May called for a June 8 election. 

The new forecasts are based on an assumption that Theresa May’s Conservatives gain a large majority on June 8 and therefore downside risks to the currency are to be found should the Conservatives fail to win a massive majority in parliament.

We would therefore imagine that if opinion polling suggests the same in the lead up to the polls Sterling would be vulnerable.

According to Deutsche Bank’s calculations, if the party fails to secure a majority in the region of 50-60 the Pound’s gains made following the election call are at risk.

Putting it all together, Deutsche Bank’s new Sterling forecast reflects a more optimistic view of the Brexit endgame, but not of Sterling fundamentals.

“We have revised the GBP/USD cycle end-point eight big figures higher from its previous low of 1.06. This returns it to levels after the Brexit vote, but before PM May’s ‘hard Brexit’ Birmingham Party Conference Speech, consistent with a reduction of crash risk,” says Harvey.

EUR/GBP is kept unchanged from present levels until 2019, reflecting our view of broadly balanced risks for the UK and the Euro Area over the next two years.

Deutsche Bank foreign exchange forecasts

EUR/GBP at 0.83 equates to a Pound to Euro exchange rate at 1.2048 and 0.8 EUR/GBP equates to GBP/EUR at 1.25.

Elsewhere in the institutional landscape strategists at the world's largest investment bank have initiated a trade that seeks to take advantage of an increase in value in the Euro against the Pound.

JP Morgan argue the historical relationship between price and positioning indicates that bulk of the GBP shorts initiated this year have been unwound, leaving positioning somewhat cleaner and therefore the ability of Sterling to fall once more becomes possible.

To take advantage of any Pound weakness and Euro strength, JP Morgan have suggested speculators put on a trade to take advantage of any downside.

"Hold a 2-month 0.8820-0.9050 EUR/GBP call spread," says Meera Chandan at JP Morgan.

However, the forecast for EUR/GBP was this month cut by JP Morgan from 0.88 to 0.87 (mid-year) and from 0.92 to 0.91 (end-year).

This equates to a Pound to Euro exchange rate upgrade from 1.1364 to 1.1494 for mid-year and 1.0869 to 1.0989 for the end-of-year.