Image © Pound Sterling Live

UK high street lender Lloyds Bank have raised their forecasts for how many euros a pound will be buying by year-end 2019.

The bank's commercial banking unit tells clients they still maintain a base-case assumption that the EU and UK will agree a Brexit deal before the October 31 deadline, which lays the platform for a stronger Sterling over coming months.

The Pound-to-Euro exchange rate has been trading in the mid-to-late 1.15s over the April-early May period, but the pair can go as high as 1.18 according to the bank's latest suite of forecasts.

In the previous set of comparative forecasts, issued in January, Lloyds forecast the Pound-to-Euro exchange rate would be ending 2019 down at 1.08.

The exchange rate is now not expected to fall out of the long-standing range of 1.10-1.20, as "the risk of an imminent ‘no deal’ Brexit reduced after the UK and EU agreed an extension to October 31st," say Lloyds in a note to their commercial banking clients.

This sees the former target of 1.08 being upgraded to 1.18.

However, political uncertainty is likely to provide a dampener on Sterling as "all options, ranging from a ‘no deal’ exit to a ‘confirmatory’ referendum or revocation of Article 50, remain in play," say Lloyds.

Indeed, volatility is expected to be elevated over coming months.

Working in favour of a stronger Sterling is the economy, with Lloyds citing a resilient and "tight" labour market as well as a robust consumer sentiment as being supportive.

Lloyds don't however see the economic resilience as being enough to push the Bank of England into an interest rate rise in 2019, however a rise in 2020 is expected.

Typically currencies rise in response to rising interest rates as global investors channel their capital into areas where returns are higher, or are expected to increase. An interest rate rise at the Bank of England would see Sterling supported as this theme comes to pass.

"With major economic and political forces pulling the currency pair in opposing directions, we see little reason for GBP/EUR to decisively break its post EU referendum range of 1.10-1.20," say Lloyds.

The Bank of England meets on Thursday, May 02 to deliver their latest assessment of the economy's performance, with some analysts saying there is a good chance Threadneedle Street will deliver language designed to prepare the market for a potential August interest rate hike.

The argument for the move is that the Bank simply can no longer sit back and leave interest rates at 0.75% while wages are growing strongly and creating inflationary pressures.

Concerning the Euro's input towards direction in GBP/EUR, Lloyds say they forecast Eurozone GDP growth to slow to 1.3% in 2019, from 1.8% in 2018.

CPI inflation is predicted at 1.3% this year, rising to 1.5% in 2020, still well below the European Central Bank's official target of "close to but below 2%".

"From an economic perspective, there is arguably a better case for the Bank of England to adopt a more hawkish stance than the ECB," say Lloyds.

The Pound-to-Euro exchange rate is forecast at 1.16 by mid-year, 1.17 by the end of the third-quarter and 1.18 by year-end.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement