Pound euro exchange rate still forecasted to appreciate despite a deteriorating UK economic outlook, but EUR happiness unlikely to last

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Published on Friday, 03 August 2012 10:15

Written by Will Peters

"We are lowering our EUR-GBP profile. We now expect a bottom of 0.75 for the end of the year" - Bank of America Merrill Lynch.

The pound to euro exchange rate is 0.23 pct in the red at 1.2712 at 11 AM in London.

Backing the single currency this morning is news that Eurozone retail sales pipped analyst expectations after registering growth of 0.1 pct. Consensus had been for a flat outturn, some analysts had even forecast a decline of 0.8 pct.


The net result are improving bond yields in Spain and Italy and a stronger euro across the board.

That said, looking further out, it would be premature to call the end of the pound / euro currency pair's ascent.

A note from Bank of America Merrill Lynch, released this morning, has forecasted the euro to fall yet further against sterling.

Indeed, 0.75 is forecast for EUR-GBP (or 1.33 for GBP-EUR).

A note from BofA says:

"We are lowering our EUR-GBP profile. We now expect a bottom of 0.75 for the end of the year. GDP fell 0.7% in Q2, much lower than market expectations for a 0.2% decline."

However a bounce back to 0.8 is pencilled in for June 2013 as the euro starts to trend higher.

The call comes as sterling faces some serious headwinds: 

Both poor weather and the Queen's Diamond Jubilee were reported to have dragged the economy throughout the quarter.

A weaker macro landscape has raised concerns about rate cuts and the growth outlook continues to weaken with further downside risks from a deteriorating European outlook.

Indeed, even in the near-term the euro could be vulnerable, as Richard Driver at Caxton FX points out:

"No concrete measures were announced by Draghi; there was no interest rate cut, Draghi ruled out granting the ESM a banking license, bond –purchases were not announced. The door was left open to bond-buying in the future but this was scant consolation. This pair is trading above €1.27 this morning and the euro looks vulnerable as we head into the weekend."