Lloyds Forecast Pound / Euro Exchange Rate Recovery Back Above 1.20, But Only in Early 2017

Research from Lloyds Bank shows the GBP/EUR exchange rate will break above 1.20 but a Bank of England interest rate cut in November should see the pair trading current ranges until the start of 2017.

• British Pound to Euro exchange rate today (14/9/16): 1.1773, 1 Month Best: 1.1999
• Euro to Pound Sterling exchange rate today (14/9/16): 0.8494,1 Month Best: 0.8334

Those watching for better or worse rates from the GBP/EUR pair have some new research to chew over - that from high-street lender Lloyds Bank.

Lloyds have released the latest edition of their International Financial Outlook which sees analysts maintain their constructive view on GBP/EUR which we initially reported in August. 

The bank asserts Sterling will more or less maintain current levels against the Euro over coming months ahead of a modest recovery throught 2017. 

The UK currency should maintain a robust tone against its continental peer owing to an  assumption that the European Central Bank (ECB) will be more aggressive in stimulating the Eurozone economy than the Bank of England (BOE).

Increasing ‘stimulus’ involves the printing money of money via the asset purchase programmes at the two Banks, which has the effect of watering down the value of the currency.

A further by-product is that it keeps interest rates low, which has the effect of lessening inflows of foreign capital in search of higher yield, or returns.

Therefore, this is a question of which central bank can dilute the value of their currency the most.

The fall in foreign demand for the host currency also has a devaluing effect.

Lloyd’s Bank’s Head of Economics and Research, Jeavon Lolay believes the ECB could win this war and is still likely to increase stimulus despite a lack of action in last week’s September meeting.

Even though ECB President Draghi did not say there would be more easing, he did say that various committee’s within the ECB were looking into innovative forms of monetary stimulus, which Lolay sees as a sign that more measures are probably in the pipeline:

“Given the weak inflation outlook and downside risks to the growth forecasts, President Mario Draghi has tasked internal committees to explore further stimulus options. This potentially opens the door for an announcement of more policy easing, probably at the December meeting.”

Nevertheless, whilst the ECB is likely to ease at its December meeting, the BOE will probably move more quickly, cutting interest rates to 0.10% in November:

“Despite the positive UK data over the past month, economic growth is still set to slow and our central view is still for a further reduction in Bank Rate to 0.1% in November,” says the Lloyds report.

Taken together it seems to suggest that the Pound may weaken versus the Euro through to November due to BoE action but that sterling may end the year strengthening against the Euro as the ECB increases stimulus in December.

Latest Pound/Euro Exchange Rates

	Live: 1.1391▼ -0.13% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1004 - 1.1049
**Independent Specialist	1.1232 - 1.1277 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The 1.24 forecast for early spring 2014 is also predicated on the Euro further weakening due to the impact of political uncertainty.

“More generally, the prospect of political tension in Europe, given forthcoming elections in the year ahead, suggests that the euro is vulnerable,” says Lolay.

The view held by Lloyds stands in contrast to that of JP Morgan whose latest forecasts we reported on earlier this week.

JP Morgan see GBP/EUR heading back to below 1.10 over 12 months.

Euro to Drift Lower as Inflation Remains Moribund

The Bank of England's reasons for cutting rates again are easy to sum up: Brexit.

But why would the European Central Bank be more agressive than its cross-channel counterpart? Inflation.

While the Eurozone's economic recovery looks set to continue at a moderate pace, Lloyds believe the outlook for inflation remains a concern.

Headline CPI inflation in July at 0.2% y/y remains well below the ECB’s 2% target, while underlying inflation trends look weak, with core CPI (excluding food and energy) below 1.0% for the fourth consecutive month.

"This suggests that current low inflation in the Euro area cannot solely be attributed to weak energy prices," says Lolay.

Moreover, a softer oil price assumption will also cast doubt on the expected pick-up in inflation.

"On balance, we expect the ECB to formally extend the end date of asset purchases by a further six months to September 2017," says Lolay.

Lloyds believe announcements of how it may tweak the rules to increase the universe of German bonds eligible for asset purchases may also be made later in the year – this includes the possible removal of the deposit rate floor or raising individual issue limits.

"A further cut in the deposit rate is also possible, but our base case is for it to remain at -0.4%. More controversially, the ECB may consider changes to the capital key to reduce the proportion of German bonds that it buys in the future," says Lolay.

The action should see the Euro remain capped against the Pound Sterling for the remainder of 2016 with some losses being seen in 2017.

Against the US Dollar the currency is forecast to drift back down towards 1.08.