Euro to Pound to Rise to 0.86 by the End of 2016
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In a veritable frenzy of forecasting banks have been busy revising their targets in light of the climactic change caused by Brexit
The EUR/GBP pair spiked higher after Brexit, from a pre-result low of 0.7595 to a post-result high of 0.8383, it is currently trading at 0.8358, threatening to break above the .83 highs and extend gains.
Whilst most analysts see the pound falling to the stronger US dollar, due to the latter’s safe-haven appeal, they are divided over the extend that Brexit will impact on the euro, with some seeing almost as much damage if not more for the single currency as has befallen sterling, and others having a more optimistic view.
ANZ Bank’s Michael Been is one of those analysts who sees the pound weakening more than the euro - despite both falling.
He and his team have forecast the pair to rise to 0.8600 at the end of 2016, and 0.8400 in September.
For the pound Been sees further weakness:
“Despite the sharp fall in GBP so far, we still see it as vulnerable to further declines. The downgrade of the UK’s AAA rating to AA (negative) by S&P has added to the negative tone. Markets had overlooked the UK’s growing current account deficit (5.2% of GDP in 2015) previously, but this alongside the uncertainty over its future trade relations and the possibility of rate cuts from the BoE, means it is still too soon to call a bottom for sterling.”
Substantial unresolved uncertainty could further undermine the pound in the near future too, adds the analyst:
“The fundamental fallout from the Brexit vote is still difficult to determine and will likely drive uncertainty in markets for some time to come. This is because the UK’s political landscape is now in a state of flux, and there is huge uncertainty over when the UK will trigger Article 50 (Q4 likely the earliest), how negotiations will go, and how quickly the UK can have FTAs set up with major trading partners like the US and Asia.”
As for the euro, Been is also negative, citing proximity and impact of Brexit, but clearly just not as negative as for the UK:
“The EUR will not be immune to GBP weakness. In addition, the single currency would be sensitive to any voices calling for referenda on EU membership by other countries looking to follow the UK’s footsteps. We now see the potential for EUR/USD to move to 1.05 or lower, and have downgraded our forecasts as a result.”
FX Strategist Pierre Carlsson at Handelsbanken, on the other hand, is more negative about the euro than he is about even the pound, suggesting fallout from Brexit could have devastating longer term effects on the European Union and the single currency.
According to his forecasts EUR/GBP will probably fall to 0.82 in one month, and then following a consolidation phase, decline to 0.78 by the end of 2016.
Essentially his argument is that the euro is damned versus the pound, whether there is a Brexit or not.
This is because if there is a Brexit the process is likely to cause a lot of damage to the Eurozone economy, both from the prolonged uncertainty of exiting, but also because it will probably fuel a call from other countries to leave, and this will hit the euro.
Alternatively, if by a miracle the UK avoids a Brexit then the pound will surge higher, returning closer to its pre-referendum levels in the 0.70s against the euro.
“We believe that when (if?) Brexit becomes a reality, the euro will suffer. If by some miracle, it is at all possible for the UK to readdress the decision, the pound would strengthen considerably. So although we think that the pound will continue to be weak, we see good chances of a lower EURGBP in the coming months,” says Carlsson.
Another reason for the euro to weaken is the potential for another banking crisis in the bloc.
There have already been warning signs from Italy where following the sudden drop in bank shares following Brexit, the Prime Minister Mateo Renzi asked the EU for a special dispensation to use government funds to bail out its banks.
Although a crisis like that witnessed in 2009 is unlikely, the sudden fall in Bank’s ‘price-to-book value’ means they will not be in a position to lend as liberally to the real economy, stymying the very conduit to growth the Eurozone so desperately needs to recover.
“It also means that the room for new or renewed corporate lending is wiped out and all of ECB’s efforts of to boost lending are nullified. Instead, a possible recession will mean new credit losses, risking some of the banks’ existence.” He adds.
Carlsson is not the only analyst with a pessimistic outlook for the euro, its clear Goldman Sachs also see weakness for the euro on the horizon after it’s most recent forecasts for the pair revealed expectations the pair would reach 0.85 in 3 months, but then fall to 0.82 in six months and 0.78 in 12.
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