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Lloyds see British Pound to Euro Exchange Rate Ending 2017 Lower than Today's Levels

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Pound Sterling is looking to record its fourth consecutive day of gains against the Euro as we move through the mid-week session as markets eye the quarterly inflation report due out from the Bank of England on Thursday, May 11.

The advance in GBP/EUR takes the market to 1.1910 and towards the year's highs witnessed in the run-up to Emmanuel Macron's first round victory in the French presidential elections.

The recovery is impressive, particularly if we note the Euro's steady outperformance of late.

Looking ahead though, we are told not to expect Sterling's outperformance to become an entrenched trend.

Steadily improving Eurozone data against a backdrop of heightened Brexit risk is likely to marginally favour the Euro over the British Pound in the year ahead we are told by analysts at UK high-street lender Lloyds Bank.

Lloyds tell their commercial banking clients they have actually lowered their end-of-year forecast for GBP/EUR in their latest International Financial Outlook report

The news will come as a disappointment to those watching the market in the hope Sterling was on the cusp of a notable period of recovery against its European counterpart.

"Overall, we believe the risks are tilted slightly in favour of euro appreciation, particularly if the euro area economic data continues to surprise as they have done in recent months," say Lloyds in the report, dated May 9.

“The potential upside for sterling looks limited, with the risk that GBP/EUR comes under further pressure in response to strong euro area data and once the Brexit talks begin in earnest,” the report adds.

However, any weakness will likely remain limited.

It is argued that neither the European Central Bank or the Bank of England look anywhere near changing monetary policy in 2017 and this makes it unlikely we will see any strong trends in GBP/EUR, as these tend to come about from divergences in monetary policies.  

GBPEURMay10

"Overall, the potential upside for sterling looks limited, with the risk that GBP/EUR comes under further pressure in response to strong euro area data and once the Brexit talks begin in earnest," say Lloyds.

Politics will still play a role going forward and while the exchange rate is unlikely to shift notably, volatility will likely still be a feature of the market.

Last month we reported that Lloyds believe Sterling will benefit on Theresa May's decision to call a general election for June.

“This could potentially strengthen Theresa May’s position in Brexit negotiations domestically, enabling her to take a less hard-line stance on EU exit. In addition, the market appears to hold a belief that the possibility of a transitional agreement at the end of the two-year negotiation period has also increased,” says Gajan Mahadevan, a Quantitative Strategist with Lloyds Bank.

Lloyds now see GBP/EUR at to 1.16 at the end of 2017; previously the exchange rate was seen trading at around 1.18 at year-end.

The pair is currently trading at 1.1915.

However, there is a risk to the forecast in the form of a stronger British Pound.

"There is a risk that the Bank of England could start to talk up the prospects of future policy tightening, particularly if, as we expect, the economy holds up well and ‘core’ inflation moves higher," say Lloyds.

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Short-term Strength Still Possible

Whilst Lloyds forecast weakness for the Pound to Euro exchange rate in the longer-term, that does no preclude strength over the near-term.

Indeed our own technical forecasts point to a marginally higher chance of strength in the short-term.

Our technical studies, for example, note that the short-term trend is higher, and that that trend is still intact and therefore more likely to continue.

GBPEURMay09triangle

The range bound activity of the last few weeks looks like an inchoate triangle pattern which will eventually grow to maturity and break out on high volatility.

It is more likely to breakout will be to the upside given the previous uptrend trend before the triangle formed.
Apart from that, a sustained break above 1.2000 could see a much more bullish phase evolve as it would reverse the long-term bearish market structure.

 

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