British Pound Forecast: Up Against the Euro, Down Against the Dollar
The British pound faces is headed in opposite directions when it comes to trading against the euro and US dollar over coming months.
The viewpoint is put forward by researchers at Barclays who have however noted that against the euro the pound sterling is likely to outperform.
The views, held in a recent global research communication, notes that there are however risks brewing with regards to the GBP’s outlook.
“Risks from the impending referendum on the UK’s EU membership also are likely to weigh on sterling at a time when the UK’s more than 6% of GDP current account deficit is increasingly reliant on portfolio inflows,” says foreign exchange analyst Jose Wynne at Barclays.
Political risks have also been cited as a reason by Morgan Stanley to downgrade their viewpoint on the pound sterling.
“While no date has been set, the referendum must occur before the end of 2017. Given elections in Germany and France in 2017, we believe the government will announce before year-end that it will be held in H2 16. While most polls suggest a preference by voters to remain part of the EU, recent ones have shown momentum growing in the “exit” camp and GBP options suggest a risk premium for the event is yet to be fully priced,” says Wynne.
However, UK economic growth remains relatively robust but a fiscal contraction of 3.4 percentage points of GDP over the next three years would be a strong headwind in an environment of surprisingly low inflation.
“While GBP roughly has kept pace with the USD this year and we expect it to continue to outperform the EUR due to a significant growth differential, headwinds may finally begin to take a toll on cable,” says Wynee.
On balance, while Barclays expect superior UK growth prospects to lead to continued sterling appreciation versus the euro, they expect GBPUSD to trend lower with EURUSD as increasing risks separate the GBP from the USD’s more positive fundamentals
Latest Pound/Euro Exchange Rates
  | Live: 1.146▲ + 0.15%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.107 - 1.1116 |
**Independent Specialist | 1.13 - 1.1345 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Bank of England to Raise Rates in Second Quarter 2016
Concerning that all-important first interest rate rise at the Bank of England markets may have to wait until 2016.
“We also expect the BoE to wait until Q2 2016 before raising rates. A delayed Fed liftoff, likely additional easing by the ECB, and increased risks from global trade and business confidence cannot leave the BoE’s strategy unaffected, even if domestic deflationary effects from production overcapacities are creating renewed concerns about inflation in core markets,” says Ajay Rajadhyaksha, Head of Macro Research at Barclays.
Like many in the market Barclays believe the BoE is only likely to move after the US Fed.
With this in mind take note of the speech made by Fed Chair Yellen on the 24th of September where she all but confirmed a 2015 interest rate rise.
“By the same token, an improvement in the external factors, including an earlier hike by the Fed, could again raise the probability of an earlier BoE move,” says Rajadhyaksha.
Will Barclays have to bring forward their forecasts for that GBP-positive interest rate rise as a result?
For pound to euro exchange rates from Barclays please see tables here, and for pound to dollar forecasts please see here.
