Pound to Euro Exchange Rate Forecast: The Pound has declined by around 1.5 cents against the Euro, reaching a 3-month low of 1.2325 in the process

The Pound has declined by around 1.5 cents against the Euro, reaching a 3-month low of 1.2325 in the process.The Pound has declined by around 1.5 cents against the Euro, reaching a 3-month low of 1.2325 in the process.

Foreign Currency Market Update – GBP / EUR Update

Decisive Central Bank action in Europe and across the pond has conspired to pull the Euro out of the doldrums as the single currency rides a tsunami wave of growing risk sentiment. Over the past week the Pound has declined by around 1.5 cents against the Euro, reaching a 3-month low of 1.2325 in the process.

Markets were relatively tentative during the first half of the week as investors waited for the German Constitutional Court’s ruling on the legality of the European Stability Mechanism. The UK Trade Balance deficit narrowed from -£10,068 to -£7,149 on Tuesday, which supported the view that the UK economy could be headed towards comprehensive growth in the third quarter.

The UK Claimant Count also exceeded British labour market expectations as it declined by -15,000 in August, however the latest string of positive UK data was not able to compete with the overarching power of the European Central Bank’s bond-buying programme. On Wednesday morning the German Constitutional Court deemed the permanent bailout fund fit for purpose, which gave Mario Draghi’s bond intervention scheme the green light. German Chancellor Angela Merkel gave her seal of approval describing it as a “good day for Europe.” The Pound slid by around 0.7 cents against the Euro in response to the decision.

Sterling’s decline against the single currency accelerated through Thursday and Friday as markets congratulated the US Federal Reserve for their decision to embark on a third round of quantitative easing. Fed Chairman Ben Bernanke pledged that the US Central Bank will buy $40 billion of mortgage-backed securities every month for the foreseeable future, until the labour market picks-up considerably. The aggressive, open-ended, approach from the Fed was taken extremely well by markets and subsequently GBP/EUR shed 1.6 cents to reach a 3-month low of 1.2325 on Friday morning.

Over the coming week the annualised UK CPI headline inflation figure is predicted to fall slightly, but the decline is not expected to offset an extension to the Bank of England’s monetary easing scheme. German ZEW Economic Sentiment Surveys are expected to improve slightly, as are Eurozone Purchasing Manager Index figures but neither set of ecostats should lead to significant market volatility.

The single currency has been dealt aces over the past two weeks from the ECB and the Fed, but although the Euro’s improved sentiment seems sound there are still a few jokers in the pack which could lead to its recent performances becoming unstuck.

The Fed stimulus measures are pretty concrete, but the ECB bond-buying programme still has lots of pitfalls: the excessive buying of bonds could have inflationary consequences; Italian and Spanish leaders may not attain the political support needed to initiate another round of, albeit softer, austerity measures; and the prospect of measuring conditionality could also throw up problems later down the line. For this reason it is important to consider the possibility of a GBP/EUR reversal, in Sterling’s favour, over the coming weeks and months.

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