– Written by
Frank Davies
STORY LINK British Pound to Euro Forecast: Strong German Ifo Caps GBP
The Pound to Euro (GBP/EUR) exchange rate consolidated close to the 1.1690 area on Tuesday, with Sterling holding above last week’s lows but struggling to make sustained headway against a firmer Euro.
GBP/EUR had found support below 1.1650 last week before recovering, although the pair remains caught between improving UK economic data and renewed support for the single currency.
The UK economic debate is also starting to shift towards the autumn Budget, with fiscal credibility likely to become an increasingly important driver for Sterling.
Scotiabank commented; “Fiscal developments have been limited but media are already tightening their focus on the autumn budget scheduled for October 28.”
UBS has a 12-month GBP/EUR forecast of 1.1765, while Danske Bank maintains a more cautious outlook and forecasts a retreat towards 1.15.
UK Economy Shows Fresh Signs of Resilience
Recent UK data has provided some encouragement over the economic outlook.
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The flash services PMI increased to 52.8 in August from 52.1 previously, reaching a six-month high and comfortably beating expectations.
The wider composite PMI also strengthened to 52.5, a level consistent with quarterly GDP growth of around 0.3%.
Consumer sentiment has improved as well.
The GfK confidence index rose to -14 in August from -17 in July, reaching its highest level in two years and beating expectations for a decline.
GfK Consumer Insights Director Neil Bellamy commented; “Does all this mean that people have greater faith in the new government to increase growth and job opportunities? Can consumers finally see an end to the cost-of-living crisis? It would be tempting to say yes, but frankly it’s too soon to tell.”
He added; “With inflation back on the rise – now at 2.9% and the highest in four months – and with continued uncertainty in the Middle East and elsewhere, there are still many challenges ahead that will test the mettle of UK consumers.”
RSM chief economist Thomas Pugh was more upbeat; “If we’re not careful, we might have to stop talking about resilience and actually start talking about a reasonable economic performance this year.”
Budget Risks Move Back into Focus
Despite the stronger economic data, markets remain sensitive to the fiscal outlook.
Government borrowing has exceeded forecasts and the upcoming Budget is likely to determine whether investors retain confidence in the new administration’s commitment to fiscal discipline.
Prime Minister Andy Burnham’s government has already announced a number of spending measures, including plans for additional affordable housing, increasing scrutiny over how these policies will be financed.
Reuters noted on Tuesday that high gilt yields are adding further pressure ahead of the October Budget, with investors increasingly focused on whether new spending will be funded through borrowing or taxation.
UBS remains relatively constructive on Sterling and commented; “UK politics have shifted from a headwind to a potential tailwind. An orderly leadership transition and fiscally credible policies should support confidence in UK assets.”
The bank also considers Sterling relatively under-owned, leaving scope for further gains if investors reduce bearish positions.
Danske Bank remains more cautious; “The UK runs a large current-account deficit, which makes GBP vulnerable when capital inflows fade; this keeps GBP at risk vs EUR in the wake of souring global risk appetite.”
German Ifo Surprise Supports Euro
The Euro received additional support on Tuesday after Germany’s latest Ifo business confidence survey exceeded expectations.
The business climate index increased to 88.8 in August from a revised 86.7 in July, well above consensus forecasts around 87.2.
The current-conditions index improved to 88.5 from 86.5, while expectations climbed to 89.1 from 86.8.
Ifo President Clemens Fuest said the German economy was recovering, with sentiment improving across all major sectors despite another increase in energy prices.
The figures reinforced other signs of improvement in Europe’s largest economy, including stronger export orders and better-than-expected industrial data.
ING also sees support for the Euro from positioning and capital flows.
The bank commented; “Latest positioning data from the futures market in Chicago points to asset managers and leveraged funds buying euro contracts.”
It added that speculative positioning remains relatively light, leaving scope for further Euro buying if confidence in the Eurozone outlook continues to improve.
GBP/EUR Forecast: 1.1650 Support Remains Important
GBP/EUR remains caught between improving UK economic momentum and a more constructive Eurozone backdrop.
The 1.1650 area remains the key downside support level after holding during last week’s sell-off.
A sustained break below this area would increase the risk of a move towards 1.1600 and eventually Danske Bank’s 1.15 medium-term target.
On the upside, the pair needs to regain 1.1700-1.1720 on a sustained basis to improve the short-term technical outlook.
Beyond this area, UBS’s 1.1765 forecast level and the 1.1800 region would become the next significant barriers.
Stronger German data and ongoing Euro buying are limiting Sterling’s upside, while relatively resilient UK activity and elevated UK yields are preventing a more substantial GBP/EUR decline.
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TAGS: Pound Euro Forecasts
