The biggest poll of foreign exchange analysts conducted by Reuters has been released and we have a clearer insight into the pound’s likely direction against the US dollar going forward.
In March we reported that the majority of investment banks and institutional analysts were forecasting the pound to trade around the 1.29 marker against the euro in April ahead of an eventual recovery into the 1.30’s.
The latest polling data from Reuters shows the median forecast for the month ahead now lies at 1.2657, a little higher than where the spot exchange rate is located today.
The results come as the British pound continues to experience downside pressures with the GBP/EUR pair averaging 1.3267 in January, 1.2890 in February and 1.2806 in March.
Of course, predicting currency movements is not easy with forecasts from major financial institutions for the GBP/EUR rate varying dramatically.
Forecasts are useful tools for providing an estimate of where exchange rates might end up, all else being equal. In reality, however, forecasts can vary among financial institutions, and new and existing external events have the power to change the course of a currency’s performance,” says Smart Currency Business in a note on the latest polls.
The lowest level forecast for one month’s time is 1.1738 and the highest being 1.3333.
That is why the median forecast of 1.2657 is important - it flattens out the noise and gives a greater degree of accuracy based on an assumption ‘the crowd knows best.’
The three month ahead median forecast lies at 1.2992, this rises to 1.3337 in six months and in a year’s time the rate is forecast at 1.3596.
However, it is the Reuters Smart Estimate which is arguably more useful to us as it creates a forecast by placing a greater weighting on the forecasts delivered by researchers who have an history of accuracy.
The Smart Estimate forecast for one month is 1.2550, 1.2918 in three months, 1.3233 in six months and 1.3654 in a year.
Even this is no guarantee however. To compare, the January Reuters Smart Estimate forecast suggested a GBP/EUR rate of £1/€1.4100 in three months’ time, around the end of March.
The GBP/EUR mid-market rate on 31st March 2016 was £1/€1.2626.
“This means a variance of over £80,000 for every €1 million changed to sterling,” say Smart Currency Business.
Analysts at the brokerage urge those with outstanding transactions to ensure they have a suitable hedging strategy in place to minimise any losses that could be incurred by being exposed to fluctuating currency exchange rates.
A Recovery Ahead
The underlying messages we take away is this:
2) A recovery will take place through the end of the year.
No doubt this reflects the view that the UK will vote to stay in the EU at the June 23rd referendum.
However, Smart Currency warn that a strengthening Eurozone could see the euro being increasingly resistant to decline against the British pound in months ahead.
The euro has been enjoying relative strength against a weaker sterling and US dollar at
the start of April.
“Should this trend continue into this quarter, Eurozone businesses trading abroad could see their export competitiveness diminish. It is possible that the ECB may continue to push policies to weaken the euro, in order to boost Eurozone export competitiveness,” say Smart Currency.