Euro to Pound Sterling Rate to Move Higher Soon say UBS and UniCredit
The declines we are witnessing in the euro exchange rate complex at the start of March should be expected - we have a crucial ECB meeting ahead.
The euro to pound exchange rate has been in decline for much of March as an oversold pound sterling corrects on a technical basis.
The decline in the EUR to GBP conversion can also be explained by the looming ECB meeting on March the 10th where some EUR-negative policy measures are forecast to be announced.
Traders will likely avoid the currency until more clarity concerning future policy is made clear.
Nevertheless, the rally higher will resume says UBS analyst Reinhard Cluse:
"We believe the market is pricing in a deposit rate cut of ~12bp and extra monthly QE of €10bn. Based on our expectations, we see scope for credit markets to rally."
In the near Reinhard says there are upside risks to core European bond yields, the euro exchange rate and gold from current levels.
Latest Pound/Euro Exchange Rates
  | Live: 1.1452▲ + 0.08%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1063 - 1.1108 |
**Independent Specialist | 1.1292 - 1.1337 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Also seeing a stronger euro is Italian lender Unicredit who expects the euro to pound sterling to extend its two-month-old rally as uncertainty concerning the UK's EU referendum will continue to weigh on the pound.
“We find that uncertainty surrounding the referendum should support EUR-GBP in the run-up to voting day,” says Kathrin Goretzki at UniCredit in London.
Goretzki says the 'referendum premium' is limiting downside risks in EUR-GBP related to further policy easing by the ECB.
The euro exchange rate complex has come under notable pressure of late as markets prepare for a strong ECB response to falling EU inflation at their March 10 meeting.
"If the ECB measures disappoint, further upside and a break above 0.80 is possible. Volatility is set to remain high over the coming months as the threat of Brexit looms." says Goretzki.
0.80 in pound to euro terms is 1.25.
The Euro is Only Winning Because of Brexit
Using a swap-differentials based model to assess the fair-value of the EUR/GBP pair and then comparing that to the actual exchange rate, Unicredit discovered that almost the whole of the up-move in the pair since the end of November can be explained by “referendum premium stemming from worries about a possible Brexit.”
The analysts go on to explain that in a nutshell, the referendum premium accounts for:
1. the probability of exit,
2. the cost of exit, and
3. uncertainty over the two.
The opinion polls suggest it could be close, but the polls were similarly close in the run up to both the Scottish independence referendum and the May 2015 general election.
"Therefore, it appears the market is pricing in a high cost of exit and/or uncertainty. Indeed, uncertainty around the referendum and the UK’s exit status is huge," says Goretzki.
Using another model based on implied option volatility for EUR/GBP by global FX volatility (to take into account the generally high volatility of recent months) the team are able to extract and distil further the U.K Brexit risk’s contribution to volatility in the pair.
When compared to volatility in the run up to the Scottish referendum they discover that in adjusted terms sterling volatility has, “only recently reached the level seen during the Scottish referendum.”
This suggests that there is scope for further gains in the pair – and therefore a drag on sterling - based on election uncertainty.
Nevertheless they add the caveat that:
“One limitation to this, however, is the ECB. A bold expansion of the central bank’s easing program could restrict upside in EUR-GBP in the run-up to voting day. However, if the ECB disappoints on 10 March, further upside and a break above 0.80 is possible.”
Euro Forecast to Fall Sharply
The strong GBP relief rally that is forecast to take place towards the end of the year is based on the assumption there is no Brexit.
However, “the relief rally will likely be less pronounced against the EUR than against the USD as we expect the euro to appreciate by the end of the year. We expect EUR-GBP to trade around 0.75 for most of 2H16 and 2017,” says Goretzki.
In pound to euro terms this equates to 1.33.
Overall, Unicredit are confident that the British people will vote to remain in the E.U and that sterling will ultimately recover:
“Importantly, we believe that ultimately the British people will vote to stay in the E.U. If we are right, sterling is set to outperform most of G10 FX in 2H16 as the removal of uncertainty should trigger a relief rally.
"However, GBP gains against the EUR should be quite limited as we expect the euro to perform almost as strongly. Both currencies are currently undervalued against the US dollar, and this is where the bulk of the correction should take place. We expect EUR-GBP to trade around 0.75 for most of 2H16 and 2017.”
Lloyds Bank Also Forecasting 0.80
We have mentioned the fundamental case for targetting 0.80 in EUR to GBP made by UniCredit, but technical studies also advocate for a move to this target.
Having enjoyed a powerful start to 2016 the euro was seen as being overbought having achieved its best levels against the pound in well over a year.
The speed of the late-February rally was particularly blistering and walking into March we were increasingly concerned about the overbought nature of the euro.
After days of decline studies suggest the euro to pound sterling exchange rate has however now shaken off some of its overbought conditions.
The recovery in the pound is viewed as a technical correction required to restore balance to the markets.
The trend higher should ultimately continue going forward with analysts at UniCredit and Lloyds Bank citing the major resistance region between 0.80-0.82 as the most obvious target going forward.
"Uncertainty around the EU referendum in the UK is likely to keep upside potential in GBP limited for now, so a move through key support at 0.7675 and then 0.7500 is needed to suggest, technically at least, that a top has developed earlier than we expect," say Lloyds in a note to clients.
Poll Shows Euro Unlikely to Record Any Further Advances
Data in from Reuters however suggests the worst may be over for the pound with the euro tipped to take a hit at the March ECB meeting.
Analysts at the world's leading 45 research instutitions have confirmed the euro is unlikely to make headway in the run up to the EU referendum which confirms a working assumption that the UK will vote to stay in the EU.
The worst-case scenarios, that include EURGBP parity, as discussed here, would not feature in the polling data as they do not form a high probability outcome.
EURGBP is expected to gain ground near-term reaching 0.7720 in one month 0.7390 in six months and 0.7240 in 12 months.
The European Central Bank is almost certain to cut its deposit rate further into negative territory and possibly expand its asset purchase program next week, the Reuters poll found.
