Euro pound exchange rate downside forecasted to be capped as authorities grow uneasy about GBP-EUR strength

Details

Category: Exchange Rates

Published on Monday, 20 August 2012 14:02

Written by Will Peters

However, there is much to support sterling in the meantime - RBS' own forecasts show the GBP-EUR rate at 1.25 in September.

• Will is on

• FX Updates to your inbox

• International Money Transfers at our sister site

• For the latest investment bank FX Forecasts please visit our International Money Transfer forecasts page, access is Free via the Facebook gateway here

The pound to euro is 0.16 pct in the blue, GBP-EUR is seen at 12743 at 14:50 in London.

RBS have today forecast that further gains in the pound euro exchange rate could ultimately be limited as authorities grow uneasy with the pound's relative strength against the single currency.

Melinda Burgess at RBS says:

"With trade weighted GBP close to 4 year highs, there is a sense of growing unease within the MPC to the recent strength of GBP, particularly against the EUR.


"This could potentially see the BoE change its stance on rate cuts. As we mentioned in last week’s report, we don’t think we’re alone in this view and so market yields have the potential to provide a natural cap on EUR/GBP downside."

However, there is much to support sterling in the meantime - RBS' own forecasts show the GBP-EUR rate at 1.25 in September, 1.28 in December and 1.30 in March 2013. .

For now there is notably little discussion within the MPC this month around a rate cut.

In addition, expectations for further easing have diminished following the Inflation Report press conference which suggested that a cut might be counter-productive.

Also backing the pound is recent UK data that has surprised to the upside providing support to GBP.

"However the Jubilee, Olympics and weather are likely to have resulted in some distortions to retail sales and the labour market. While an upward revision to the second release of Q2 GDP (Friday), ultimately we expect a contraction in the economy this year and only a sluggish rebound in 2013," says Burgess.

Hence, this is unlikely to change the monetary policy outlook.

Risks remain skewed to a further £50bn of QE in November.

With the ECB posed to take more action and Germany reportedly considering easing Greece’s bailout terms there is risk of a correction higher in EUR/GBP in the short term. Hence, focus will be on the Greek meetings with the EU and Merkel later this week.