The Difinitive Forecast for the Pound Against the Euro From the World's Top Research Houses

The world's most extensive poll of foreign exchange forecasters suggests the British pound may have seen the worst of the Brexit-inspired declines, all being equal.

The latest Reuters foreign exchange forecast poll has seen analysts downgrade their forecasts for the pound over the 1 month, 3 month and 12 month timeframes.

Importantly though, it would appear much of the uncertainty posed by the EU referendum has been absorbed by the exchange rate.

Forecasts will have been lowered in the wake of the February 'Brexit meltdown' where we saw the pound slump in dramatic fashion against the euro.

To be fair, the risk premium being absorbed by sterling has been evident since the currency broke away from tracking interest rate spreads in early December 2015, it is only recently that commentators and the popular press have picked up on this.

Price action in March has been encouraging for those hoping for a stronger pound as we have seen GBP/EUR rally off lows at 1.26 and the currency pair closed the week above 1.29.

Now that the EU referendum campaign has started and we have more clarity on timing the market has been able to more accurately absorb the risks surrounding Brexit and has priced the pound accordingly.

In fact, analysts are working from the assumption that sterling will retake lost ground from the euro as we move through the year, particularly in the second half of 2016 following the EU referendum.

Latest Pound/Euro Exchange Rates

	Live: 1.1391▼ -0.13% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1004 - 1.1049
**Independent Specialist	1.1232 - 1.1277 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Watch for a GBP to EUR Recovery to 1.38 H2 2016

The worst-case scenarios we have been hearing of late, that include EURGBP reaching parity, as discussed here, would not feature in the polling data as they do not form a high probability outcome.

All financial forecasters continue to assign a probability of less than 50% that the UK will vote to leave the EU and forecasts will most likely move with changes in probability.

Of course each institution has its own probability.

Based on the working assumptions around Brexit and ECB action the pound to euro exchange rate is forecast to be at 1.2953 in one month’s time, around about where the exchange rate is today.

In six month’s time, in the wake of the EU referendum, the exchange rate is forecast to rise to 1.3532.

In a year the exchange rate is forecast to rise to 1.3812.

These are downgrades to the respective forecasts made last month which read at 1.3280, 1.3550 and 1.400.

ECB Action to Keep Euro Under Pressure

The euro will come into focus the nearer we get to the all-important March 10 policy meeting.

According to forecasters action from the ECB is likely to protect the pound against the euro which would be seriously hampered by any aggressive stimulatory action.

Reuters polling data confirms currency analysts are basing their current projections on the assumption the ECB is almost certain to cut its deposit rate further into negative territory and possibly expand its asset purchase program next week.

Indeed, there are up to ten different measures the ECB may adopt, combinations of which make the event incredibly hard to call.

"We expect the ECB to increase its monthly asset purchases by at least €10bn (from €60bn currently) on 10 March and cut the deposit rate by 10bps from -0.3% currently, probably with a tiered structure," says Reinhard Cluse, Economist at UBS.

UBS think the ECB will likely decide to include corporate bonds in its asset purchases, but not bank bonds.

"We expect the ECB to keep some of its powder dry, and reconsider the end of its QE programme, currently March 2017, and tapering at a later stage," says Cluse.

A New Threat for Sterling

Notably, we are yet to see any major changes to institutional projections based on increased chatter about a potential Bank of England interest rate cut.

In the wake of the poor Services PMI figures released on the 3rd of March we have noted more talk about the potential for Bank of England members to start voting for interest rate cuts.

Presently forecasts are largely based on the assumption that the next move from the Bank of England will be a rate rise, should this change we could expect notable cuts to forecasts over coming weeks.