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Nomura Strategy: Buy Pound to Euro Rate

Nomura strategists Pound to Euro exchange rate

  • Market rates:
  • Pound to Euro exchange rate today: 1 GBP = 1.1426 EUR
  • Euro to Pound Sterling exchange rate today: 1 EUR = 0.8750 GBP

Foreign exchange strategists at Nomura Securities are looking for the Pound to gain against the Euro over coming weeks.

Central to the view will be the guidance on future interest rates delivered by the European Central Bank and Bank of England. More specifically, what will matter for foreign exchange markets is how market expectations regarding future rates are dealt with by the two central banks.

“As we approach the ECB meeting next week we see a risk of a slowdown in EUR appreciation,” says Andrew Cates at Nomura Securities in London. “Even though we expect the ECB to change its forward guidance further, we doubt the change would be a major positive surprise for the market.”

The global financial services giant expect the ECB to take another step toward policy normalisation next week by removing its QE easing bias from the statement.

This should pave the way for an announcement at the September meeting that tapering will start in January.

But, “no change in the forward guidance or negative comments on the recent market re-pricing from President Draghi could weaken EUR quickly,” says Cates.

Nomura are overall bullish on the Euro anticipating a longer-term recovery. However, they are happy to exit their ‘long’ exposure on the currency in anticipation of a period of depreciation.

George Buckley, a currency strategist with Nomura is actually advocating traders buy the Pound against the Euro in anticipating of a recovery over coming days and weeks.

“We see more than enough reason to expect an improvement in Sterling’s fortunes, or if anything a bias to expect further deterioration in EUR against GBP into next week’s ECB meeting,” says Buckley.

The analyst is not content to simply call a near-term end to the Euro rally, he is quite confident on a more assertive Sterling comeback:

“Short EUR/GBP looks attractive from a tactical ECB/BoE trade,” says Buckley referencing how he thinks a potential August rate rise at the Bank of England will contrast with an European Central Bank keen to keep settings static for a while longer.

Such a contrast backs their bullish stance on the Pound.

“We see more than enough reason to expect an improvement in Sterling’s fortunes, or if anything a bias to expect further deterioration in EUR against GBP into next week’s ECB meeting,” says Buckley.

Nomura note this is an important meeting for the ECB as expectations of a ‘hawkish shift’ - i.e pointing to higher interest rates and exiting the quantitative easing programme - are high.

The market is hoping the ECB will remove its forward guidance that the “Governing Council stands ready to increase the programme in terms of size and/or duration.”

“Without a continuation of these small “baby steps to normalisation” or a further emphasis on the optimistic outlook, it would be a further removal of the support to what have come to be known as the ‘Sintra trades’” says Buckley.

At Sintra, Portugal, a host of central bankers took the chance to warn that a future of higher interest rates lay ahead. The likes of the Pound and Euro benefited while the Dollar fell as markets saw higher returns coming out of the UK and Eurozone in the future.

“Even though it has already moved lower in the past two days, we still see room for further EUR/GBP downside into the July ECB and August BoE meetings,” say Nomura.

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Too Soon to Buy the Pound

Understandably, there are other views concerning the near-term outlook for GBP/EUR.

Analyst Manuel Oliveri of Credit Agricole believes this week's data docket poses a risk to Sterling. 

Retails sales on Thursday and inflation data on Wednesday are tipped to be a key currency driver as they should further inform the whole Bank of England debate i.e strong data = more of a liklihood of a 2017 interest rate rise.

"While it cannot be excluded that positive incoming data is making a case of even further rising central bank rate expectations to the benefit of the GBP, we believe that upside from the current levels is likely to prove limited," says Oliveri.

"This is especially true as intact uncertainty as related to Brexit is likely to prevent the BoE from considering higher rates anytime soon, regardless of several central bankers less dovish stance. As such we advise against buying the GBP around the current levels," adds the analyst.

 

 

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