The outlook for the euro against the British pound sterling (Currency:GBP) is bright say analysts at UniCredit Bank who say recent sterling strength is mere consolidation before further weakness.
For reference, the euro pound exchange rate is 0.67 pct higher at 0.8573 at 15:10 in London.
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"Having risen sharply in the second half of 2012 and the first couple of months of 2013, EUR-GBP appears to have recently consolidated around the 0.85 level. However, we view this stabilisation as only temporary and believe the cross should resume its upward trend in the medium term," says Vasileios Gkionakis, Head of Global FX strategy at UniCredit Bank.
UniCredit see EUR-GBP at 0.90 by end of 2013. (Or 1.11 in pound to euro terms).
Reasons for euro pound exchange rate advances
According to UniCredit there are a number of reasons for this:
Firstly, a constructive view of the eurozone and the common currency argue in favour of a reduction in risk premia in the euro area.
"As periphery spreads continue to tighten, GBP should lose its "shine" as a safe haven currency and appetite for sterling – which drove EUR-GBP lower in 2011 and the first part of 2012 – will probably abate," says Gkionakis.
Secondly, despite the recent raft of positive surprises, the UK still faces a number of structural challenges.
On one hand, the current account dynamics appear unfavourable, as the c/a balance stands at -3.7% of GDP, down from -1.3% in 2011 and -2.5% in 2010.
The large dependence on exports to the euro area (approximately 47% of total exports) poses significant headwinds to the UK economy, given the low growth outlook that UniCredit foresee for the eurozone.
Additionally, the UK has a very small dependence on exports to emerging markets (only 5% of total exports are directed to the BRICs), areas that are still considered the driver of global growth.
"Finally, lending channels within the country remain impaired; the annual growth rates of loans to businesses have recovered somewhat since the depths of the crisis in 2008-09 but are still negative and are certainly way below historical averages," says Gkionakis.
With a very challenging external backdrop, lending at home in a standstill and subdued consumer confidence, UniCredit say they think the road to recovery will be very bumpy.