Today's Pound to Euro Exchange Rate Update: 1.2755 Seen as First Target

mario draghi impact euro to dollar rate

The GBP to EUR exchange rate closed the week below a key trendline and analysts are sharpening their pencils to deliver their latest negative forecasts for the pair - what levels can we look forward to over coming days?

You are on official warning - the pound sterling is turning course against the euro. Yes, we saw some sharp movements lower in the exchange rate earlier this week, but they were not sharp enough to convince us that the April-May recovery was dead.

The declines recorded on Friday the 3rd do however threaten to break the market's back and shift momentum into negative territory on GBP/EUR.

Driving the pound sterling lower against the euro has been the sudden shift in the investment landscape following worse-than-expected employment data out of the United States.

The data has convinced markets that no interest rates are likely to come out of the US Fed in the near future, a situation that has triggered a sharp demand for euros. 

"GBP has under-performed today, which is not a surprise given what appears to be an increasingly close referendum. We would expect Cable to continue to lag the EUR/USD rally and GBP/EUR to fall to 1.2755 with outside risk to 1.2658/1.2610," says Chris Turner, an analyst with ING in London.

We note that the breaking of a trendline on the daily charts will invite selling interest to remain dominant until the early May congestion zone at 1.2650 is achieved and believe the pair could settle here, all being equal.

Analyst Piet Lammens at KBC Markets in Brussels says he expects sterling to remain in the defensive as the campaign on the EU referendum intensifies.

"A sustained break below 1.2903 would be a first indication of further deteriorating sterling sentiment. We maintain a sterling negative bias," says Lammens.

Looking at the EUR/USD's prospects, further gains are also forecast.

"EUR/USD is performing well too. Short EUR positioning is nowhere near as large as it was last December. We suspect sellers may return in the 1.1500 area on the assumption that if the US really is slowing, the ECB may after all threaten fresh stimulus," says ING's Turner.

The Winners and the Losers

Looking at the performance of the FX majors in the week gone by we note that the New Zealand dollar was the clear winner. There was no obvious catalyst for the performance, but we would say the country's superior interest rate yield will be attracting investor flows.

The pound was the worst performer with the currency dragged down by a jump in volatility ahead of the EU referendumn with polls close and bookies shortening odds against a ‘leave'.

The yen surged after the consumption tax increase was postponed and further fiscal easing was promised.

Strong Australian GDP data helped the AUD a bit.

ECB Fails to Boost the Euro

The euro exchange rate complex was seen holding gains against most of its G10 counterparts after the ECB revised up their growth and inflation forecasts.

The ECB governing council have opted to keep settings on interest rates and monetary policy unchanged at their June meeting.

However, new figures released in the meeting statement showed they revised up their growth and inflation projections, in the short-term.

The revisions aided a rally in the euro as rising inflation is widely seen as being the one element that would prompt the Bank to desist from EUR-negative policy measures in the future.

Starting with inflation, the ECB revised up 2016 HICP inflation to 0.2% from 0.1% (currently at -0.1%).

For 2017 they kept forecasts at 1.7% and for 2018, they actually revised down their estimates to 1.7% from 1.8% - reflecting the new gentler price growth outlook. 

The euro fell initially to 1.1160 against the US dollar on the mixed messages held in the revisions, but then recovered, rising back up to highs of 1.1220. 

As for growth, the ECB staff revised up their projections to 1.6% from 1.4% in March, in 2016. They maintained a growth rate of 1.7% in 2017 and revised down growth in 2018 to 1.7% from 1.8% previously.  

The ECB see risks as still tilted to the downside for growth due to: 

"Developments in the global economy, to the upcoming British referendum and to other geopolitical risks."

Significantly, Draghi said that whilst growth was expected to pick up in the second half of 2016, it was likely to rise at a slower pace than the forst half. The reference to slower growth in the second half was a new phrase not in previous statements.

It may have caused the initial fall in the euro.