Euro to Pound Exchange Rate: Strength and Then a Drop to the 0.60’s

TD Securities have told clients the pound sterling will likely continue falling against the euro - but - a strong rally will then push the EURGBP to new lows.

The British pound continues to underperform many of its G10 peers after UK trade and construction data disappointed in August.

The Bank of England then added further pressure on the unit after hinting that no interest rate rises are imminent.

The EURGBP exchange rate moved higher as a result and traders are monitoring a break above 0.7445 as a key threshold for further gains.

"On a medium-term basis, we maintain a strong conviction that EURGBP will trade to fresh lows for this cycle, but we think a steeper correction is due. From today’s vantage point, we think a move to the 0.7500/50 region may present an attractive entry point for re-loading strategic shorts," say TD Securities.

The entire euro to pound sterling exchange rate’s outlook at the Canadian bank rests with interest rate policy at the Bank of England and European Central Bank.

Following October’s decision to keep interest rates on hold analyst James Rossiter at TD Securities in London says the Monetary Policy Summary and minutes painted a less urgent picture to raise rates, with a lower forecast for inflation and a possible shift in the perceived timing between policy rate changes and inflation.

“We remain comfortable with our forecast of a May 2016 Bank Rate hike, but clearly the risks are now biased towards the second half of the year rather than earlier,” says Rossiter.

Two things in particular stand out in the wake of the October minutes argue TD Securities:

First, the MPC provided an update to its inflation forecast, which it now expects to remain below 1% until spring 2016. The MPC noted that weaker inflation since August was not entirely due to lower energy prices, which suggests some persistence to the weaker numbers.

This leaves the Governor in letter-writing territory until mid-2016, which is an important hurdle to cross before Bank Rate is increased.

Second, the minutes noted that some Committee members thought that lags in the response of inflation to Bank Rate changes has become shorter than previously thought.

This would suggest that those members would wait until a more sustained pick-up in inflation had occurred before wanting to raise rates.

The overall dovish slant to this edition of the MPC’s minutes adds to sterling’s recent headwinds as the UK’s growth momentum slowed over the last several weeks.

“While we remain comfortable with May 2016 as our most likely candidate for lift-off for rate hikes by the BoE, the risks now seem skewed to a later hike,” says Rossiter.

Euro to Pound Sterling Exchange Rate Tipped to Rise

This backdrop suggests that the latent overhang of long-GBP positions is likely to come under additional pressure – at least in the near term.

TD Securities think the upward correction in EURGBP may take another leg higher as a result.

“We think a move to the 0.7500/50 area is not unreasonable in the foreseeable future, while we note longer term resistance comes in at around 0.7590 and 0.7655,” says Rossiter.

However, Rossiter believes any euro strength presents attractive entry points from which to sell the euro:

“From today’s vantage point, a rebound to these levels could present a very attractive entry point for strategic shorts targeting an eventual move down to the mid-60s.”