- GBP/EUR forecast lowered

- Basic trade deal between EU and UK expected

- Expectations for BoE easing to start rising again

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GBP/EUR spot rate at time of writing: 1.1093Bank transfer rates (indicative guide): 1.0805-1.0882FX specialist rates (indicative guide): 1.0930-1.0993Get a bank-beating quote hereInvestment bank Crédit Agricole have lowered their Pound-to-Euro exchange rate forecasts, citing expectations for further easing by the Bank of England and an expectation for Brexit-related uncertainty to persist into 2020, even if the UK and EU are able to strike a trade deal.

"We have lowered our long-term outlook for the GBP vs the EUR," says Valentin Marinov, Head of G10 FX Research & Strategy at Crédit Agricole in London in a regular monthly assessment of the foreign exchange market.

The call comes as the Pound registers a one percent advance against the Euro over the course of the past month, that has taken the GBP/EUR exchange rate back to 1.11, a reflection of the improvement in data coming out of the UK economy and growing expectations that an autumn trade deal will be reached even if the headlines surrounding Brexit trade negotiations are not constructive.

"The UK economy has started emerging from the Covid-19 recession and the BoE has further concluded that the worst of the downturn is behind us," says Marinov.

"That said, lingering Brexit uncertainty as well as concerns about a second of wave of the pandemic continue to cloud the outlook, especially as the government support for the labour market is due to come to an end in the coming months," adds Marinov.

The UK economic recovery accelerated in August with flash PMIs released last week showing the Composite PMI - which takes into account the share of services and manufacturing in the economy - read at 60.3, which is better than the 57.1 that markets were looking for and stronger than July's reading of 57.0.

By contrast the Eurozone's Flash PMIs, also out on Friday August 21, stood at 51.6, below the 54.9 expected and the 54.9 reading from July.

If foreign exchange markets were purely concerned with economic outperformance, the Pound-Euro exchange rate would have flown higher on this outcome and would most likely have carried this momentum in the new week.

Indeed, GBP/EUR went higher following the PMIs, however Sterling's rally against the Euro, Dollar and a host of other major currencies was cut short by an update from EU and UK trade negotiators who confirmed little progress had been made and that without some compromises the two sides would be unable to strike a trade deal.

The Pound's reaction served as a sharp reminder to markets that Brexit remains a critical driver of Sterling's valuation even if it has been absent from the front-pages since Prime Minister Boris Johnson won a parliamentary majority last November that allowed him to pass his Withdrawal Agreement.

"While we expect that the UK and the EU will reach a compromise on the Brexit trade deal by the end of this year, we suspect that a lot of uncertainty would remain given the difficulty that the Johnson government has securing trade deals outside of the EU," says Marinov.

Market consensus appears to have settled on the notion that a 'bare bones' trade deal will be reached at some point in the Autumn, which would be no means represent the kind of 'far reaching' deal either side would preferred to have agreed. This suggests that even with a deal there would still exist constraints to trade and the ease of doing business, which would in turn suggest a limit to the Pound's upside potential.

Furthermore, striking trade deals with the rest of the world remains a sizeable task with U.S. trade negotiations now only expected to conclude in 2021 while negotiations with Japan appear to have tumbled over issues concerning cheese.

New Zealand's Deputy Prime Minister Winston Peters has meanwhile said his country is "very frustrated" at the slow progress being made in striking a post-Brexit trade deal with the UK. Peters said the UK was not "match fit" when it came to negotiating which suggests trade in 2021 will be anything but smooth as the UK becomes a fully fledged independent trading entity.

Concerns that a slowing in the economy on the back of covid-related drivers and unfavourable trading conditions will in turn invite further support from the Bank of England which could well consider boosting quantitative easing further or cutting interest rates into negative territory.

"All this could fuel market expectations of further easing by the BoE and keep the headwinds for the GBP in place especially vs the EUR. At the same time, the GBP could be able to track the EUR higher vs the USD, in our view," says Marinov.

Image courtesy of Crédit Agricole.

The Bank of England in August said it was content to keep settings unchanged as the economic recovery was progressing as expected, which in turn saw markets cut back on expectations for a future rate cut into negative territory.

However, these expectations will remain conditional on the evolution of economic data releases over coming weeks and should expectations for negative rates and a boost to quantitative easing grow again, the Pound could well come under pressure.

"We have lowered our long-term outlook for the GBP vs the EUR," says Marinov.

The Pound-Euro exchange rate is forecast at 1.0989 by the end of September, 1.11 by the end of 2020 and end-March 2021, ahead of 1.1235.

However, the Pound's profile against the Dollar is more constructive, with an expectation for further U.S. Dollar weakness acting as a prop to the pair.

The Pound-Dollar exchange rate is forecast at 1.30 by the end of September and by the end of 2020, ahead of a move to 1.32 by the end of March 2021 and 1.33 by mid-2021.

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(Research courtesy of FXwatcher.com).