What is the Pound to Euro forecast?
Predicting the movements within FX rates is the role of FX analysts and strategists who study fundamental and, or technical data, from which they make an FX forecast.
These are educated guesses or estimates about where an exchange rate will be, or is headed in a specific time frame.
FX forecasts are compiled using a variety of data which includes macro economic reports, central bank policy, both current and future, the performance of other currencies and economies, as well as historic and current price action and currency relationships.
At the most simplistic level an FX rate tells us how much currency A is worth in currency B and vice versa. This is what’s known as a relative relationship.
The value of two respective currencies is influenced by differentials between the two economies in key metrics such as interest rates, inflation and unemployment etc.
For example, all else being equal, a country with higher interest rates will usually have a stronger currency than one with lower interest rates. Simply because money flows to where it will receive the highest return.
Many FX traders and analysts try to forecast the future values of FX rates by watching and comparing economic data releases in the countries whose currencies they trade.
Most economic data is published to a known schedule in a fixed cycle, weekly, monthly quarterly etc.
For example, US unemployment data is published monthly in arrears with the release falling due on the first Friday of the following month. These scheduled data releases combine to form the economic calendar.
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Will the pound get stronger against the Euro in 2021?
The pound could appreciate against the Euro in the balance of 2021 because the UK central bank, the Bank of England, is thought likely to start to reduce, or taper its asset buying, or QE program.
QE is a form of monetary stimulus under which the Bank of England or other central bank creates new money electronically, and uses this new cash to buy assets, usually government and other high quality bonds, which it then holds on its balance sheet.
Monetary stimulus is typically accompanied by low or even negative interest rates; the reduction or withdrawal of monetary stimulus is therefore seen as a precursor to an interest rate rise.
As we have already noted, the currency of a country that has or is likely to have higher interest rates than a peer is likely to rise in value against that currency.
As things stand the UK is seen as one the countries that will tighten interest rates sooner rather than later perhaps as soon as its next meeting to be held on November 4th.
By contrast, the ECB is thought unlikely to raise interest rates on the continent before 2023.
Interest rates aside, other factors that will influence the value of the pound against the Euro are rates of growth and inflation in the respective economies.
How quickly and how sustainable the economic recovery from the pandemic turns out to be, and how well respective governments deal with any fresh covid waves that could threaten to lockdown or greatly interrupt an economy will be a factor.
As will political stability (or the lack of it) and the state of government finances, around spending, revenues (tax), debt and deficits will also have a part to play.
Pound to Euro weekly forecast
Forecasts for individual currency pairs are submitted by analysts and are aggregated to form an average or consensus forecast for that pair.
A poll of 25 analysts shows that the consensus forecast, for one weeks time, is that EUR GBP will trade at 0.8417.
If we invert that figure, the Euro is expected to weaken to 1.1880 versus the pound over the coming week compared to the 1.17481 that it’s currently trading at.
Analysts are divided about how the Bank of England’s monetary policy committee will vote when it convenes on Thursday.
A Reuters poll suggests that the nine member committee will vote 6 to 3 in favour of keeping UK rates unchanged.
Though when the MPC last met in September they voted 9 to 0 to leave rates unchanged.
What’s more the Bank of England has only raised UK interest rates 6 times since it became independent in 1997.
Oxford Economics analyst Andrew Goodwin believes that the BOE will eventually raise interest rates, but he doesn’t believe that now is the time to act saying that:
“With rising inflation mainly due to global factors and households facing considerable cost-of-living challenges over the winter, we think a tightening of rates by the MPC would be a mistake,”
Pound to Euro monthly forecast
Having weakened over a weekly time frame, analysts expect the Euro to strengthen moderately against the pound over the coming month,with a consensus forecast for a rate of 0.8476 or 1.1798. 52% of the analysts polled were bullish of the Euro over this time frame, by contrast only 22% were bullish over the next week.
Not only will we have seen what the Bank of England does and says about interest rates during this time frame, but we will also get to see how the market reacts to any tapering.
Not just the knee jerk reaction immediately after the announcement but a more considered view that comes from a bit of distance. The strength or otherwise of the US dollar can have direct effect on both the Euro and the Pound sterling
Pound to Euro yearly forecasts
When forecasting an FX rate 12 months into the future analysts will use some additional tools and will look at how other markets are pricing related instruments,such as bonds and swaps over the same timeframe.
One of the biggest differences between the rate or price of an FX pair today and 12 months into the future is the cost of carry. Or if you prefer the implied cost or return you would incur if you had to tie up your money to finance the position out into the future.
In FX markets this amounts to the interest rate differential between the two components of a currency pair.
The current 12 month forward rate for GBPEuro is 1.1623 or 0.8603.
The forward rate is not an FX forecast; it is merely a mathematical calculation about future values.
Analysts will, however, use this as a guide or benchmark when they make their 12 month forecast.
Dutch bank ING’s FX team believes that the Euro will be weaker versus the pound in Q4 2022 and trading at 0.82 that’s the equivalent of 121.95.
Which as you can see is a very different number to the 12 month forward rate.
ING’s team are interest rate hawks and they believe that the Bank of England will raise interest rates soon saying that:
“The recent message from Governor Andrew Bailey has been fairly blunt – he wants to act, and sees little point in waiting”
“This has been epitomised by the lack of pushback against the ever-increasing amount of tightening priced into financial markets over recent weeks”.
FX Forecasts online resources
Here are a selection of useful links for FX forecasts and tools