British Pound Sterling to Euro Forecast: Will the GBP-EUR Exchange Rate Recover to 1.4000?

January 26, 2016 - Written by Ben Hughes

STORY LINK British Pound Sterling to Euro Forecast: Will the GBP-EUR Exchange Rate Recover to 1.4000?

European Central Bank (ECB) President Mario Draghi sent out a defiant message to critics of his Bank’s policy path of recent years when he delivered a keynote speech at the Deutsche Börse Group New Year’s reception 2016 in Eschborn, Germany last night.

The euro (EUR) saw buying support today after Mr Draghi delivered a surprisingly confident speech.

The Italian moneyman opened up with a go-ahead assessment of the state of the euroland economy, telling the assembled audience that, ‘the euro area has started the New Year facing two opposing forces: a strengthening domestic economy and a weakening global one,’ before explaining that, ‘at home, the recovery is proceeding, with consumption as the main driver.

That is being supported by our accommodative monetary policy, falling energy prices and a neutral fiscal policy. Employment is rising, up by over 2 million people compared with the trough in 2013.’

Today's fx markets find the Euro to Australian Dollar exchange rate is -0.52pct lower at 1.54264 EUR/AUD, whilst the Euro vs Canadian Dollar exchange rate is trending -0.01pct lower at 1.53388 EUR/CAD.

Euro Exchange Rates Forecast to Decline after Draghi Defends QE

Investors gave a tentative ‘thumbs up’ to Draghi’s comments, sending the Pound vs euro exchange rate down into the lower part of the 1.3100s in the period following the speech.

However, support for the shared currency is by no means guaranteed to continue into the medium term given Draghi’s strong defence of the ECB’s ongoing Quantitative Easing programme last night.

The ECB Chief reminded listeners that, ‘since the middle of 2014, when we launched our credit easing package, bank lending rates have fallen by 80 basis points for the euro area, and by between 100 and 140 basis points in the countries hit hardest by the crisis. To put that in perspective, to have a similar impact on lending rates with conventional policy would’ve required a one-off rate cut of 100 basis points.’

GBP/EUR Exchange Rate Predicted to Return to 1.4000

Draghi concluded his speech by asserting that, ‘confidence comes from every party fulfilling its mandate. And that's what the ECB will do.’

Analysts took this as a clear statement of intent that Draghi is determined to return the pace of inflation in the euroland to its target level of 2.0%, which many think means he is once again readying his 'policy bazooka'.

With global oil prices remaining at or close to multi-year lows, most investors will feel that the only way for Draghi to deliver his promise is to extend Quantitative Easing – a move which would be likely to send the pound vs euro exchange rate back up to the 1.4000 level.

However, whether the currency is able to return to the over seven year highs seen in 2015 remains to be seen. While focussed on the UK, some 'Brexit' predictions have started to suggest the EU would suffer in the event of a split as well.

As it stands, negative BoE rate hike speculation is weighing heavily on GBP exchange rate demand.

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TAGS: Euro Forecasts Pound Euro Forecasts Pound Sterling Forecasts