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Foreign exchange analysts at Morgan Stanley expect the euro to pound rate to fall in 2017. We examine the latest euro-related fx forecasts targeting the sterling and the US dollar in the short, medium and long-term GBP/EUR forex outlooks
The EUR/GBP exchange rate is trading up 0.26% at £0.8545 on Wednesday around noon in London, analysts forecast the EUR/GBP to decline towards £ 0.7700 level in 2017 as no negative news from the UK should help sterling to recover after heavy Brexit related loses in 2016.
“We think GBP will be at such an undervalued level and political uncertainties will be higher in the Eurozone to mean we can use rallies to sell EUR/GBP,” Morgan Stanley analyst forecast in the Global FX Outlook for 2017 on Wednesday.
“We target £ 0.77 for the 2017 year-end” Morgan Stanley quantified it forecast further.
With the UK government triggering article 50 in the first quarter of 2017, the economic growth data are expected to weaken.
At the end of the first quarter, the divergence in views between the EU and the UK is expected to be the widest, driving sterling to its post-Brexit lows.
“The fact still remains that the EU is more important for the UK than the UK for the EU as a whole. This creates an imbalance of power during any negotiations, possible triggering hard Brexit scenario,” Richard Falkenhall from SEB Bank noted on Wednesday.
As UK Prime Minister Theresa May showed recently, the government may aim to reduce the uncertainty in the business community, which should help GBP.
“We are by no means saying the UK is out of the woods, just that the currency has already had an aggressive move and, in the absence of bad news that could shock markets, the environment is set for the currency to strengthen,” Morgan Stanley analysts reason their prediction.
In terms of market positioning is still heavily short GBP which favors the short EUR/GBP trade next year.
“GBP/USD is currently 15% below the purchasing power parity estimate and we think that foreign investment flows may return to the UK once the currency is cheap and expectations for further currency weakness reduce, supporting GBP,” Morgan Stanley claims further.
Latest Pound/Euro Exchange Rates
The euro conversion rate (against pound) is quoted at 0.853 GBP/EUR.
The EUR to USD exchange rate converts at 1.064 today.
NB: the forex rates mentioned above, revised as of 30th Nov 2016, are inter-bank prices that will require a margin from your bank. Foreign exchange brokers can save up to 5% on international payments in comparison to the banks.
Euro (EUR) exchange rates to be exposed to political risk in 2017
Higher inflation expectations in the US are likely to spill over to the Eurozone as well, but if the ECB choses to tighten the monetary policy via tapering of its asset purchases, it could cause an unwanted tightening of financial conditions and real rates.
This is the reason why analysts from Morgan Stanley expect forex investors to respond by pushing EUR lower, driven by expectations of continuous easy monetary conditions.
On the top, the EUR is likely to be exposed to political risk with French presidential elections and German parliamentary elections scheduled for 2017.
“We think that a market expectation of an actual European Monetary Union break-up is required for EUR to fall aggressively,” Morgan Stanley analysts wrote in the Global FX Outlook for 2017.
French presidential elections are scheduled for April/May while German parliamentary elections will be held on October 22, 2017.
Analysts need to wait for developments past both elections to monitor potential risk of new government’s plan to withdraw from European Union.
Pound Sterling (GBP) is Undervalued at Current Levels
In view of many analysts, sterling has reached undervalued territory in post-Brexit depreciation against major counterparts, but it may not have seen its lows yet.
While improvement in global economy may help to ease some of the Brexit-related adjustment pressures, the UK business investment may weaken further in anticipation of potential loss of access on single European market.
“First quarter of 2017 should mark the low point for sterling, from which a prolonged GBP rally may set in,” Morgan Stanley forecasts.