Experts Predict the Exchange Rate in 2016

Thursday, March 10, 2016

Experts Predict the Exchange Rate in 2016

The sterling to euro rate has been the major driver in the overseas market in 2015, but what will happen next? What will be the factors affecting how far our pound stretches?

From the highs to the lows in the past year has been a difference of £22,000 on the price of a £200,000 property. The ups and downs can be off-putting, but they needn't be a surprise. The factors governing whether a currency rises and falls are well established, a complex interplay of the various financial data that determines how optimism traders feel about a nation's economy. Movements can, to an extent, be predicted.

There are two principal sides to the equation: the success of the Eurozone and the success of the UK economy, plus a few wild cards.

Many of the factors that ruled currencies on 2015 are still in play today. In the Eurozone in 2015, explains Jana Korpova of Smart Currency: "Markets were unsettled by the prospect of Greece defaulting on its debt and exiting the Eurozone, heightened by the country's government elections, which were won by anti-austerity party Syriza." Could this resurface?

In the UK, the Conservative election victory and reasonable economy performance helped the pound early on in 2016. Since then, the slowdown in China and the global economy has hit the pound. A fear factor seems to have arisen around the British economy, but could we really be heading into recession again so soon?

The wildcard factors for 2016 include the US election. If a right-wing Republican like Trump or Cruz wins, would he raise trade barriers as promised and damage the global economy? The Middle-East is another risk. If the Saudis continue to pump oil in a bid to bankrupt rival oil producers with low prices, is that a boost or hindrance to the global economy? And perhaps the biggest problem of all, where is China's economy heading?

We asked the leading currency brokers in the UK to tell us where they think the exchange rate will be on 1 September 2016, and why. We got some surprising answers...

Phil McHugh, Dealing Manager, Currencies Direct

On 1 September 2016: €1.35 to €1.40

Appetite for the pound has fallen in the "risk off" environment and highly volatile early 2016 - caused by fallout in China, freefall in oil and equities and comments from George Osborne and governor of the Bank of England (BoE) Mark Carney on global risks. Domestically weak manufacturing, stagnant inflation, deficit concerns and the Brexit vote added reasons to sell the pound. The euro emerged as favoured currency.

However the sharp fall may have been overcooked and the pound's fortunes could swing quickly. If we see an improvement in economic data snaps, calming of global growth concerns and particularly some wage growth we could see the BoE change its tone pretty quickly.

The fact that the ECB is now geared for more monetary easing as early as March means we would expect to see GBP/EUR back in the 1.35-1.40 range by September.

Charles Purdy, CEO, Smart Currency Exchange

On 1 September 2016: €1.29 - 1.40

The key factors determining the rate by September are, for the UK, firstly, economic growth and whether the 'cocktail of risks' highlighted by George Osborne occur.

Secondly, an interest rate rise, but this seems unlikely until late-2016 at the earliest. Thirdly, the Brexit referendum, which would have vast repercussions; the potential for a referendum in 2016 needs close monitoring.

The European factors to look out for are, firstly, the risk that current low inflation in the Eurozone could turn into deflation. Next, if the Eurozone economy remains sluggish, will the ECB increase quantitative easing or drop interest rates even further into negative territory?

Thirdly, will the refugee influx have economic ramifications, possibly positive effects on labour markets and economic growth?

Richard Spenser, Moneycorp

On 1 September 2016: early 1.30s with no summer crisis, early 1.40s with a crisis.

Global issues stemming from China's slowdown have made the euro an attractive bet. The threat of a global financial crisis hurts the pound more because the UK is heavily dependent on financial services.

The Bank of England killing off expectations of an imminent rate hike, plus the referendum on UK exit from the EU expected this year creating uncertainty, are problems for the euro, but much greater issues for the pound.

While deflation may resurface, it seems more likely that the euro will remain well supported during the coming months. The collapse in oil prices to $27 is acting as a stimulus to the Eurozone, so the ECB is less likely to increase quantitative easing or cut their interest rate. The Eurozone's improving economic performance (1.6% in 2015 with 1.8% expected in 2016) is broadly based, which has restored confidence.

Peter Rexstrew, Chief Executive, Premier FX

On 1 September 2016: Around 1.36

Europe is still in the mire a little bit and people don't realise that. Sterling is weak against the euro now because the stock market is down. Bank levels are down and people are quite bearish on sterling because of some bad economic figures. But that's just a short-term thing.

As the year goes on we might see an interest rate hike which would buoy up the pound. If the dollar can get a little bit softer and the pound can recover then you'll see the sterling-euro going up as well.

It's going to be quite volatile over the next 9 to 12 months.

Louisa Ballard, Head of Private Desk, RationalFX

On 1 September 2016: late 1.30s

Bearish attitudes to the UK economy and the BoE's downbeat forecasts on GDP and inflation (low commodity prices, slower than expected wage growth) mean no immediate interest rate rise, putting the pound under pressure.

Brexit, according to some European banks, could lower UK GDP growth by 0.5 to 1 per cent a year over the next decade. Amid this uncertainty, investors have become nervous and will look to sell off pounds.

Many expect the ECB to loosen monetary policy further, but they took a stance against in December and a core mandate for all central banks is to foster financial stability. The ECB cannot deviate significantly so soon from December's stance without fostering financial instability and speculation.

So in early 2016 pounds to euros could go even below recent lows under 1.30, but if Brexit uncertainties and the bearish economic outlook wanes then we could see rates push back up into the late 1.30s.

David Johnson, Director and Analyst, Halo Financial

On 1 September 2016: €1.44

Britain edging towards EU exit creates immense potential for volatility in 2016. A referendum before September makes any forecast a shot in the dark. Technically speaking, however, the pound is oversold at €1.30 and there's substantial buying interest in the euro at €1.42.

I suspect this will be the trading range in early 2016. However, with the juggernaut of China slowing, removing export markets for EU and UK manufacturers and with slumping oil and energy costs keeping inflation at bay, central banks will be on high alert trying to keep currencies weak and averting recessionary pressures. For all the doomsayers out there, there are those who believe 2016 will be the start of the real recovery.

The euro is likely to remain weak for at least the first half of the year and UK PLC is still relatively attractive for growth if not for yield. By September 2016, the swing is likely to come back from a weak pound towards a more sustainable euro.


Christopher Nye

Originally published in A Place in the Sun magazine - Issue 125