GBP/EUR 6 Month Forecasts: 1.20 Possible say HSBC, 1.31 say BofA Merrill Lynch
- Written by: Gary Howes
Sterling has been in decline against the euro since the start of December, and if HSBC's forecasts are anything to go by the journey lower still has further to go.
The forecasts released by HSBC also contain some interesting messages on the growing liklihood of Bank of Japan foreign exchange market intervention and a raising of the USD to CNY forecast.
But the highlight for those looking to send money to Europe, or indeed booking their summer holidays, is that the dossier from HSBC includes forecasts showing sharply lower GBP to EUR conversion in 6 months.
This is a tricky year for the pound sterling owing to the EU referendum which presents more scnearios for the curency than in ordinary years. As an example of just how exciting the ride will be, post-referendum action will see the pound surge higher in the opinion of forecasters.
GBP to EUR at 1.20 in Mid-Year
The stand-out view in the HSBC update is their modelling on likely direction in the pound to dollar exchange rate.
Importantly, we observe that HSBC think the GBP is most likely to end up at 1.60 by the end of 2016 based on the assumption that the UK stays in the European Union.
HSBC believe that the pound to dollar exchange rate is undervalued to the tune of about 7% at the present moment owing to the amount of Brexit risk already written into the exchange rate. A deeper insight on the matter is provided here.
Note that if there is a brevet and interest rates rise at the Bank of England sooner than markets expect the GBP-USD could move lower by 12 to 17%, however no Brexit and an early BoE move invites a rally of 10%.
If Brexit occurs and the Bank of England delays raising rates then we could see a slump of 15 to 20%.
The pound to euro exchange rate is meanwhile forecast to come under sustained pressure ahead of the vote with 1.20 being priced in by mid-year, around the date of the EU referendum.
This call is thus laden with Brexit premium.
The pair will however shoot back to 1.3157 on the event of the UK staying in Europe ahead of a rise to 1.33 by year end.
Latest Pound/Euro Exchange Rates
  | Live: 1.1447▲ + 0.03%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1058 - 1.1104 |
**Independent Specialist | 1.1287 - 1.1333 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
GBP to EUR at 1.31 in Mid-Year
The big issue for sterling in 2016 is of course the EU referendum which is expected to take a significant amount of strength from sterling.
Also updating clients with their reviewed forecasts are Bank of America who, while also factoring in Brexit, don't see as deep a decline as HSBC.
The preferred month for the EU referendum is June and GBP/EUR is seen at 1.3158, above current levels which implies the currency is oversold in their view.
The pound is expected to decline to a minimum at 1.2987 in September ahead of a recovery to 1.38 by year end.
However, Bank of America do concede that risks to their euro forecasts are biased to the upside, i.e the betray a lack of confidence as pertaining to potential euro strength, particularly against the US dollar.
Latest Pound/Euro Exchange Rates
| | Live: 1.1447▲ + 0.03%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1058 - 1.1104 |
**Independent Specialist | 1.1287 - 1.1333 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
"The risks are for further changes to our projections in the same direction. EUR/USD could stay well above parity if the ECB fails to deliver decisive easing this year, whilen the Fed remains on hold or even eases again," says the client note.
In the risk scenario that our US economists are considering, including a more severe market sell-off, deterioration of US data and Fed QE, we would expect EUR/USD above 1.15 and USD/JPY at 100 by the end of the year.
Reading between the lines, if the bank see EUR/USD delivering upside surprises the EUR/GBP would likely act in a similar fashion.
HSBC Issue Japanese Currency Intervention Alert
HSBC forex analysts also alert clients that the move to negative rates had only a fleeting impact on the JPY but showed a desire for a weaker currency.
As a result the bank is alerting clients that direct FX intervention grows as a major threat as USD-JPY moves below 115.
The forecast dossier says:
“The FX intervention threat also has to be considered a function of the relationship between the JPY and the Japanese equity market.
"We believe that policymakers will be reluctant to let the Nikkei index stock market fall beneath 16,000, for example. Historically, this has been an important technical level, and it has coincided with policy action in the past.”
USD to CNY Forecasts Upgraded
The other major focus of the latest HSBC insights is the raising of the end-2016 USD-CNY forecast to 6.90, from 6.70.
The call comes in anticipation of a subtle shift in policy from gradual to accelerated FX flexibility.
“We believe the CNY effective exchange rate should moderate over time from current elevated levels, given the cyclical and structural pressures in China's economy and its balance of payments,” say HSBC.
Analysts do not believe radical options – such as a significant 'one-off' devaluation or a de facto USD peg – are likely to be taken.
China is too large and too influential in the global economy and financial markets to take on the high risk that comes with such extreme policies.
"But we still need to be aware of the conditions – capital flows, domestic risks, and G3 currencies' outlook – that could lead to a
reassessment of policy choices," say HSBC, "whichever policy path China takes, we believe RMB volatility will rise further from here, be it in the spot and/or in the forwards."