Future-Proofing Your GBP/EUR Rate Payments in the Face of Growing Headwinds

The outlook for the GBP/EUR exchange rate remains challenging and presents a headache for those looking to transfer funds into the Eurozone.

• Return of EU referendum weakness sees fresh slump in pound to euro exchange rate
• Lloyds Bank warn of falls to 1.25 and then to 1.21 if GBP doesn't snap out of its losing ways
• Contrarian view at Morgan Stanley sees GBP recover to 1.37 by June
• Now could be the time to engage in a 'forward' purchase to minimise against risk on major euro payments

Is now is a good time to buy euros with your pound sterling or are you best served by waiting for a more favourable currency climate?

No doubt many watching this pair will have been hoping the March recovery could continue and deliver rates at least higher than 1.30.

Nevertheless, sterling has fallen from a peak of 1.4322 to the euro in November, to lows of 1.2612 in February this year and price action over the past 24 hours confirms the downtrend is still in control.

A fresh bout of GBP selling comes as a poll showed the ‘out’ side with a lead ahead of the June 23 referendum on Britain’s EU membership.

"The spectre of an EU without Britain, and vice versa, fans a critical thing markets loath: uncertainty – which is tantamount to negativity for a currency," says Joe Manimbo at Western Union.

We would therefore suggest that those who cannot afford to transfer at lower rates act now in order to minimise risk. In this market, with trends pointed where they are, risk management should pip all other considerations.

The conviction we have on sterling's chances of forming an sustainable recovery remains tepid, at best, as we remain trapped in a range between 1.3072 and 1.2618.

"The longer this range plays out the more likely it becomes that we still see a move towards key long-term channel and Fibonacci support in the 1.25-1.2195 region," says Robin Wilkins at Lloyds Bank, "at this stage a rise through 1.3071 is needed to suggest further near-term strength to test more important resistance in the 1.3245-1.3423 zone."

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.

 

The Pound's Decline Steals Value on European Property Purchases

To put the decline in perspective, take the example of a 300,000-euro home.

Such a home would have cost 209, 468 British pounds in November 2015 when the exchange rate was at 1.4322; today the same house would cost 232,594 pounds, an increase of 23,126 pounds in four months, amounting to a roughly 10% rise in cost simply due to the weakening pound.

Given the pound’s extraordinary decline now would not seem the best time to buy a property in Europe, and indeed many analysts would concur, arguing sterling may have reached a bottom, thus skewing risks to the upside.

The primary reason for sterling’s decline has been fear of the consequences of the U.K leaving the European Union and ultimately we will not know for sure whether the U.K will exit until after the June 23rd referendum.

If the U.K votes to leave, the pound will almost definitely weaken even more, with most economists expecting it to lose 10-20% in the immediate aftermath.

Those with an eye on their dream holiday home therefore might be better off buying before the referendum or they might just lose their chance for a protracted period of time.

Using Currency Forwards and Options

Alternatively, forward buying euros at the current exchange rate for delivery at some date in the future – whether five, six months or a year in the future, could be another way of side-stepping referendum-risk.

Forwards essentially lock in the current exchange rate, erasing any potential currency risk. On the downside the buyer of the forward can also miss out on any favourable appreciation in the rate – something worth considering in this situation.

Another way for buyers to hedge their risk around the referendum might be to forward buy half the euros they need now, and the remainder at a later date – either after the referendum or at the purchase date.

Some brokers also offer currency options which enable buyers to forward buy but also to potentially profit from an appreciation in the currency, so that if the exchange rate moves in their favour they are rewarded, whilst if it doesn’t they still get the protection afforded by a standard ‘forward’ contract.

Options often work well around volatile events, making it the perfect tool ahead of the June 23 referendum, since large moves can often follow. 

How the Forecasts Stack up

Most major bank analysts believe the electorate will vote to stay, for example Morgan Stanley assign a 65% chance of such a scenario.

But, as we note here, with or without Brexit this investment bank is negative on sterling's prospects for at least the next two years as the UK's growth profile eases.

Most analysts are in agreement; if Britain votes to stay in the EU the pound will rise sharply, with some expecting to increase by as much as 10%, which would essentially see it climb back up to November 2015’s levels in the 1.40s.

Therefore based on purely weighing the probabilities the most prudent course of action could be to wait - hoping the betting agencies are right and the pound will discount its Brexit premium.

Waiting does however leave you exposed to volatility in the interim and should polls show the Out camp is gaining then sterling could test its February lows again, or go lower still.

The Contrarian: 2016 Will be Horrible for the Euro

Maybe our tone on sterling is too negative and the outlook for the GBP/EUR is actually not as bad as we are making out.

No doubt the euro faces significant challenges going forward with one major forecasting suggesting it could even fall to parity against the US dollar in coming months.

Such a hefty slump would surely keep the pound supported against the euro as it implies the shared currency faces notable challenges and weakness.

“We remain bearish on EUR on a structural basis, looking for a move to parity against USD by the end of the year,” say Morgan Stanley.

The investment bank’s bearishness rests primarily on three pillars:

1) European bank weakness owing to highly leveraged balance sheets
2) The ECB will act further over coming months
3) Politics will hit the euro, particularly those surrounding the refugee crisis

As such, Morgan Stanley are forecasting the pound to euro to trade at 1.3698 by the middle of 2016.

The rate is expected to end the year at 1.31 though, nevertheless, this is certainly higher than where we are presently.