Pound to euro: Forecasts show the Euro is likely to weaken on the back of ECB action

Last Updated on Tuesday, 31 January 2012 14:00 Written by Will Peters Tuesday, 31 January 2012 13:57

The pound to euro exchange rate is 0.13% higher at 1.1973 while the euro to pound exchange rate is 0.14% lower at 0.8355.

A morning exchange rate note from Barclays Capital has shown that the 1 and 3 month exchange rate forecasts for the EUR GBP exchange rate are at 0.84. The 6 month forecast is at 0.82 while the 1 year forecast is at 0.82.

According to analysts Euro weakness will largely stem from ECB liquidity operations (LTRO).

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"We think the next LTRO will add to downward pressure on the EUR. The ongoing Greek bailout negotiations are likely to be a source of volatility and though we do not expect them to significantly weigh on the EUR, we think that hopes of a rapid reduction in risk are likely to be optimistic," say BarCap.

Despite the Fed’s eagerness to remind the world that it is going to carry on supporting the US economy and still sees severe risks facing the US recovery, analysts think that US monetary policy is unlikely to be a major driver of EUR/USD.

BarCap therefore advise that they have revised their short-term EURUSD forecast lower, but are not changing their longer-term forecasts.

A loosening of effective monetary policy now suggests that there will be less easing to come so this changes the path over the short run but not the eventual level.

In terms of trading EUR/USD, investors are therefore looking at a similar picture to the one that has prevailed for the past few months: a choppy depreciation with plenty of periods when investors worry about upside risks to the EUR.

Put spreads have been the most effective way of trading the EUR and that remains the case.