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Updated Euro to British Pound Sterling Forecasts: GBP Could Hit 1.25 vs the Euro in 2014, But There Are Risks Warn Danske

By Rob Samson

Danske Bank's latest exchange rate forecasts for 2014 suggest the British pound (GBP) can look forward to further gains ahead against the Euro. But, there are risks to this pro-GBP view.

The British pound (GBP) is forecasted to maintain an upward trajectory against the Euro, this is according to analysts at Danske Bank who see the pound to euro exchange rate trading at 1.25 by the end of their 2014 forecast period.

We hear from Danske's currency analyst Arne Lohmann Rasmussen as to why the British pound should outperform the euro through the course of 2014:



British pound to euro exchange rate forecasts 2014

February Update: The GBP may not rally at all

The strong numbers in the UK makes it increasingly likely that the BoE might have to hike rates this year adding further to GBP support. On the other hand, the BoE might stick to a very dovish stance and the key indicators might also start to disappoint. Our EUR/GBP forecast is also based on the view that the ECB, contrary to the BoE, will ease monetary policy further in 2014. If this is not the case, the expected sterling appreciation might not materialise.

Why we are forecasting a stronger British Pound (GBP) in 2014

The combination of the BoE being less dovish and the prospect of euro weakness on the back of the ECB being on an easing bias means we now see EUR/GBP moving lower over the coming year.

However, despite the expected appreciation, we believe the GBP will stay in fundamentally ‘undervalued’ territory in 2014. We assume that the current low correlation between GBP and USD will be re-established in 2014.

Superior UK economic Growth

Economic activity has been strong and the unemployment rate has dropped significantly over the past couple of months. It is now likely that the 7% unemployment threshold will be breached in the spring. GDP increased by 0.8% q/q in Q3 13 and numbers suggests that growth has accelerated further in Q4 13.

UK numbers, e.g. housing data, continue to be very strong. However, the UK surprise index has actually been trending lower over the past couple of months, showing that the market is getting used to strong numbers. Furthermore, the money market has now priced in the first rate hike as early as Q1 15. The BoE might try to correct this pricing, saying that that rate will not be hiked this early.

Monetary policy

The Bank of England (BoE) has said it will not consider tightening policy, at least until the unemployment rate falls to 7%. However, in the November Inflation Report, it moved its forecast for this threshold to be met from Q3 16 to Q3 15. However, it will probably be met earlier and monetary policy is expected to support GBP in 2014.

The latest BoE report underlined that the BoE will be less dovish in 2014 than previously expected. On the other hand, we expect the ECB easing bias and a cut in the deposit rate to negative to weigh on the EUR in 2014. All in all, relative monetary policy is in favour of the GBP.

Flows

Speculative positioning seems to be neutral in GBP.

Valuation

From a long-term perspective, GBP is still clearly undervalued (PPP around 0.77 for EUR/GBP).

Risks

The strong numbers in the UK make a breach of one or more of the ‘knockouts’ quite likely. If this happens, a more pronounced GBP appreciation than we forecast could occur. However, note that the money market has already priced in that the first rate hike will take place in early 2015. The BoE might also change the threshold holding rates low for longer.

2014 forecast for the British pound sterling vs the euro

  • One month: 0.83 (GBP/EUR at 1.2408)
  • 3 months: 0.82 (GBP/EUR at 1.21951)
  • 6 months: 0.81 (GBP/EUR at 1.2346)
  • 12 months: 0.80 (GBP/EUR at 1.25)