EUR/GBP Monthly Fundamental Forecast – December 2015

Outlook and Recommendation

The EUR/GBP ended November at 0.7019 as the euro weakened on comments from the ECB ahead of the December meeting as Draghi promises additional stimulus. The shared currency may weaken to $1.04 in the near term, although this will be a difficult level to break through, said Alvin T. Tan, a London-based strategist at Societe Generale SA. From a risk-reward perspective there is “not much point jumping on the bandwagon here,” he said.

The ECB is forecast to boost stimulus even though the institution is less than halfway through its bond-buying program. More than three-quarters of respondents surveyed by Bloomberg said the ECB will cut its deposit rate from the current minus 0.2 percent.

“The euro has moved as expectations of ECB easing have mounted,” SocGen’s Tan said. “It’s clear the market is expecting more than a 10 basis-point deposit-rate cut, so probably the ECB will deliver at least 20 basis points of rate cut, plus further enlargement of the asset-purchase program to even move the needle”

Options traders have been cutting positions that would benefit from a weaker euro. The premium on one-month contracts giving the right to sell the shared currency over those to buy narrowed to 0.39 percentage point Monday, from as wide as 1.16 percentage points on Oct. 23, data compiled by Bloomberg show.

The euro is down around 4 percent for the month and more than 12 percent in 2015 so far. The market is divided on how far it will fall this year towards parity with the dollar.

“Everybody knows that the ECB is going to do something and the Fed as well,” said Sanjiv Shah, chief investment officer with Sun Global in London. “If it was going to go to $1, it would have gone already. Probably in the first quarter of next year we will see an attempt on parity.”

Soft inflation readings for the euro zone on Monday and Tuesday would strengthen expectations for ECB action at its Dec. 3 meeting, but whatever the outcome, an easing appears to be largely factored in.

That has left much of the action in recent days in other European currencies. The Swiss franc slumped last week on speculation the Swiss National Bank would respond to ECB action by cutting deposit rates further into negative territory and may already be backing that up with intervention.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Major Economic Events That Will Affect The Markets In December