Forex focus: euro has experts sitting on the fence

What are the chances of the euro reaching €1.42 again any time soon? We asked the experts

It was only a few weeks ago that sterling peaked at a seven-year high against the euro at €1.42. Since then the single currency has regained around six cents.

That might not sound much, but if you were planning on spending £100,000 you’d be €6,000 worse off and if you received £1,000 a month you’d have €60 less to spend.

So what are the chances of the euro reaching €1.42 again any time soon? A straw poll among currency specialists showed opinion was divided.

Among those in the positive camp, is Charles Murray of FC Exchange ( fcexchange.co.uk ), who said: “In the short-term 1.40-plus is still a strong possibility, as Greece is dangerously close to running out of money 20 April touted as a likely date for this to happen.”

Alistair Cotton from Currencies Direct ( currenciesdirect.com ) also expects the rate “to move back towards 1.40 over the coming months”.

Caxton FX’s ( caxtonfx.com ) Nicholas Ebisch is even more upbeat: “There is scope for the rate to return to its peak of 1.4250 soon. The predictions for the euro over the next three months are that there will be steady euro weakness.”

Trevor Charsley at AFEX ( afex.com ) agreed, saying: “On the premise that we get a similar government to the incumbents we do see GBP/EUR testing 1.4250 after the election. The next target after this is 1.4500.”

Angus Campbell from FxPro ( fxpro.co.uk ) doesn’t believe there is much that can help the euro, saying, “It is hard to see the euro regaining too much of the ground it lost in the first quarter of the year despite its recent best efforts to do so.”

On the other side of the euro fence, among the pessimists is Chris Towner of HiFX ( hifx.co.uk ). He said: “We would expect the euro to strengthen back again towards €1.30 in the months ahead.”

Josh Ferry Woodard is also in this camp, saying, “As long as Greek officials manage to keep the Hellenic nation inside the eurozone then we could see GBP/EUR weaken towards 1.32-1.34 over the next three months.”

Those sitting on the fence include Chris Saint of Hargreaves Lansdown (LSE: HL.L – news) ( hl.co.uk ) is reluctant to commit while the UK fights its closest general election in decades. He said: “Sterling’s 10pc rise since the start of 2015 to highs of €1.4250 looked to be a little too far too fast and I don’t see it reaching these heights again before we know the outcome of the election. However, the euro’s longer-term weakening trend looks to be intact and I suspect sterling could re-test these highs later in the year, particularly if ‘Grexit’ fears linger as UK political risks fade.”

Charles Purdy of Smart Currency Exchange ( smartcurrencyexchange.com ) is also hedging his bets: “The euro is unlikely to show major strengthening in the short term but also unlikely to see further significant weakness, especially as other countries such as the UK and the US will be very reluctant to see their exporters unduly penalised.”

The huge question mark hovering over the direction of the pound is the UK election in May.

David Kerns of moneycorp ( moneycorp.com ) said: “The GBP/EUR rate appears to have peaked in the short term at €1.42 as sterling itself has come under selling pressure following some disappointing economic data releases at home.

“As the general election looms ever closer that too can have a detrimental impact on the pound as investors shy away from the UK until the leader of the next parliament is known.”

A hung parliament of some form or another looks likely at the moment and none of the outcomes is completely positive. A slim Tory win, while generally encouraging for the pound, has the drawback that David Cameron’s promised referendum on the EU will depress sterling.

However, the biggest threat to the eurozone is the risk that the Greek debt crisis will mean it exits the currency bloc. As negotiations between the Greek government and its creditors heat up and deadlines get nearer, starting this week, the euro is likely to start wobbling.

“The main danger from a ‘Grexit’ is that it sets precedence for departure from the euro,” said Charsley. “Something that Mario Draghi the ECB governor has said is irreversible. If he is proven to be wrong, this could be the beginning of the end for the euro.”

And that’s not all. The eurozone is still struggling with too many out of work, particularly in the southern states, low or no inflation and quantitative easing, which all combine to keep downward pressure on the currency.

But, from a self-interested point of view, a continuing weak euro is going to be welcomed by businesses and expats getting funds in pounds.

Tumbling euro brings windfall to holiday budgets

The pound has been rising pretty steadily against the euro for more than a year. You could buy 1.22 euros for every pound last summer – and by Christmas the rate had climbed to 1.24, according to figures from Travelex, and since then it has jumped by 10per cent. Anyone exchanging £500 should get around 660 euros, compared with 590 last year – but use a site like money.co.uk to check the best rates.

Sterling has also risen against a range of other currencies. It has more than doubled against the Russian rouble – so for an Easter trip to Russia your roubles would cost half as much as two years ago. Sterling exchange rates against the Norwegian Krona, Australian Dollar and South African Rand are also high.

The strong pound in Europe is largely down to the weakness of the euro. Chris Saint, head of currency dealing at Hargreaves Lansdown, says: “The ECB is printing money on a pretty big scale – 60 billion euros a month until September 2016. When the decision was announced in December the euro fell sharply and has dropped about 15per cent over the past three months.”

Anyone who picked up their holiday cash for an Easter break earlier in the month , when the rate hit 1.40, looks to have done well.

Some commentators predict a further slide in the euro. But if you are planning a trip to Europe in the summer, it might be worth exchanging some of your money now in order to lock into favourable rates. Mr Saint says: “Currency markets can be volatile. They also tend to overreact, so the euro rate could come down as quickly as it went up.”

Brian Jamieson, managing director of Centtrip, says: “Many of our customers are locking in current attractive rates and buying euros to use today or at a later date.”

You can get foreign currency from a bank, building society or bureau de change. You can even exchange money at the Post Office, Marks & Spencer and some of the big supermarkets.

Just about everywhere you will pay “no commission” – because sellers make their money on the exchange rate.

Bob Atkinson, travel expert at MoneySuperMarket, says: ” When buying foreign currency, focus on the total price including charges rather than the exchange rate, and compare the cost of the same amount of holiday cash between providers to find the best deal.

“If you’ve left it too late to organise your cash, then pre-order it for collection at the airport via Travelex, as this will save you a significant amount on airport walk-up rates.”

If you are ordering your currency over the phone or online, watch out for delivery fees. A charge of £5 or so for delivery could wipe out the benefit of a better exchange rate.

An alternative to cash is a pre-paid currency card. You simply load it up with your chosen currency in advance and use it like a debit card when you are on holiday. You can find details of pre-paid cards on price comparison websites, but CaxtonFX, FairFX and Ukash often come out well.

Again, you should look for a card with a decent exchange rate. Watch out for fees, too. Many cards charge an application fee of up to £10. Some cards also levy a fee for each transaction. Fees for cash withdrawals at an ATM are common. You might even be penalised with an inactivity charge if you don’t use the card for a certain period.

Karen Harkin of Asda Money, which runs its own currency card, says it allows holidaymakers choose when they buy their travel money, loading currency onto it over time, rather than at one go. Rates are locked at the time of purchase and holidaymakers can use it in the same way as a credit or debit card. The Asda card has no fees for ATM withdrawals.

Myles Stephenson, chief executive of MyTravel Cash said cash loading onto its prepaid Euro Currency Card was up more than 45 per cent so far this year compared to early last year.

When it comes to using cards abroad, it pays regular travellers to apply for a credit card such as Halifax Clarity (open to all) or Nationwide Select (open only to Nationwide current account customers), which do not charge transaction fees for purchases abroad.

If you do have to use your normal credit or debit cards, be sure to make payments in the local currency instead of paying in pounds. This can save up to 5 per cent of hidden extra cost.

Mr Atkinson says: “Make sure your card provider knows you are travelling overseas or you may find your transactions are blocked. If you are lucky enough to return home with unused spending money, you have a few options. You can keep it until your next trip if it’s a popular currency, or try and sell it to a friend at the rate you bought it. If you do need to sell it back to a provider then shop around for the best rate, and remember to focus on the total amount you’ll get back, rather than the rate and charges.”

Euro hits 3-week high against sterling, up 0.8 percent

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Positive signs continue for sterling pound

A positive end to the week saw sterling further its gains against both the euro and US dollar, as a member of the US Federal Reserve’s monetary policy committee spoke out about the dangers of a premature increase in US interest rate.
The week ahead could be an important one for sterling, with a host of data released from the UK, including Purchasing Managers Index (PMI) data from a number of industries.
This will be closely followed on Tuesday by the PMI for the construction industry, which has shown significant expansion over the past year. PMI data for the services sector on Wednesday will be eagerly awaited, with this sector contributing to around 70 percent of UK industry.
Following this we will see the release of the latest interest rate decision from the Bank of England. Following recent comments from BoE Gov. Mark Carney, it is highly unlikely we will see a rate change, resulting in something of a non-event here.

The euro
The euro had a mixed day on Friday, as official data earlier showed that French consumer spending rose 0.6 percent last month, significantly beating expectations for a 0.5 percent fall. December’s figure has also been revised up to a 1.6 percent increase. Yet the single currency lost ground again on Friday.
The euro zone data flow is high this week. Just like the UK they will be releasing the Purchasing Managers Indices for all sectors and all countries during the course of the week.
The European Central Bank (ECB) is also holding its monthly meeting. There is expected to be no change in the euro zone interest rate but they will be issuing an updated economic forecast on growth.
Expectations are for a positive upgrade — it should be noted that Germany and Spain recorded greater growth rates than the UK for the final quarter of 2014 — so we may see some support for the euro. It also has to remembered that the ECB have been keen for euro weakness to boost activity and exports and this does seem to be happening.

US economy
Friday was a positive day overall for the US, who saw their economy grow by 2.2 percent, making it the fastest growing economy in the developed world. Another welcome development came in the form of positive consumer confidence. However the US dollar was undermined towards the end of the day as a Federal Reserve Member cautioned against US interest rates being increased too quickly.
Another busy week is in store for the US, starting with the Purchasing Manager Indices (PMI) for Manufacturing coming out on Monday, as well as personal income and spending. Federal Reserve Chair Yellen has described these data releases as a possible threshold that she wants to see increase before raising interest rates.
Yellen is actually due to speak mid-week — she may vote for an interest rate hike, with a few Federal Reserve members already suggesting June as the possible month for the start of a rate hike. Non-Manufacturing PMI is out also due, and expected to show continued growth, along with an indicator for employment change.
Thursday will see another indicator for unemployment claims data for the US, leading up to the all-important Non-Farm Employment change data released on Friday.
Federal Reserve member Williams also speaks on Thursday, shining the spotlight on another member predicting when the start of an Interest rate hike may take place.
Friday is likely to be the most volatile day for the US dollar with the non-farm employment change due, which has shown steady positive growth in the employment market. Average Earnings data is also out, a key figure that the Federal Reserve want to keep an eye on, along with the trade balance figures and unemployment rate following from the Employment change release.
The fortunes of the US dollar are moving up and down in these uncertain times. If you are looking to buy or sell US dollars, we suggest contacting your trader now for the latest rates, economic and market news and currency buying strategies.

Japanese yen
The Japanese yen had a poor finish to the week, dropping against the US dollar at the end of the week. Official data showed that Japan’s household spending fell 0.3 percent last month, compared to expectations for a 0.4 percent rise. This followed a 0.4 percent increase in December. This was not the only piece of poor news for Japan on Friday, as a separate report showed Japan’s retail sales declined at an annualised rate of 2 percent, much worse than experts’ expectations.

Canadian dollar
Friday saw the Canadian dollar jump, as demand for its US counterpart dropped, shrugging off data that showed a consumer price fall last month, despite the initial higher expectations.

Charles Purdy is director of Smart Currency Exchange, London.

Sterling hits 7-year high vs euro, Carney's testimony eyed for rate outlook

imageLONDON: Sterling rose to a seven-year high against the euro on Tuesday, after a Bank of England policymaker said British interest rates could rise in the near future should inflationary pressures pick up quickly.

Kristin Forbes said in a speech that the risks from a return of inflation, asset price bubbles in the financial sector and levels of consumption and savings were “moderate and manageable” at the moment. But these merited “close attention.”

Her comments came less than an hour before BoE Governor Mark Carney along with some of his colleagues will testify to parliament’s Treasury Committee. Analysts and traders expect the central bankers to see through the recent drop in inflation and highlight the steady economic growth.

Sterling rose to 73.17 pence per euro, up 0.2 percent on the day. It was trading at 73.28 pence before Forbes’ comments. It was flat against the dollar at $ 1.5452, but the gains against the euro pushed sterling trade-weighted index to 91, its highest in over six years.

Marshall Gittler, head of global FX strategy at IronFX Global, pointed to Carney’s comments nearly two weeks ago that “the most likely next move in monetary policy is an increase in interest rates”.

“If they maintain their tightening bias as seen in the Bank’s inflation report, this could be sterling-positive,” he added.

Carney’s comments and recent upbeat economic data have led to a steadying of rate hike expectations — after they were pushed back by more than a year. Investors are pricing in the chance of the first rate hike by the BoE in early 2016.

With almost all major banks forecasting more losses for the euro as the European Central Bank embarks on quantitative easing, the pound looked likely follow the dollar higher this week if testimony by Federal Reserve chief Janet Yellen affirms expectations of a U.S. rate rise this year.

Petr Krpata, currency analyst at ING said that any clarification from the BoE on the timing of the first rate hike, could see euro/sterling drop to 73 pence.

Copyright Reuters, 2015

Sterling hits 7-yr high vs euro, Carney's testimony eyed for rate outlook

LONDON, Feb 24 (Reuters) – Sterling rose to a seven-year high against the euro on Tuesday, after a Bank of England policymaker said British interest rates could rise in the near future should inflationary pressures pick up quickly.

Kristin Forbes said in a speech that the risks from a return of inflation, asset price bubbles in the financial sector and levels of consumption and savings were “moderate and manageable” at the moment. But these merited “close attention.”

Her comments came less than an hour before BoE Governor Mark Carney along with some of his colleagues will testify to parliament’s Treasury Committee. Analysts and traders expect the central bankers to see through the recent drop in inflation and highlight the steady economic growth.

Sterling rose to 73.17 pence per euro, up 0.2 percent on the day. It was trading at 73.28 pence before Forbes’ comments. It was flat against the dollar at $ 1.5452, but the gains against the euro pushed sterling trade-weighted index to 91, its highest in over six years.

Marshall Gittler, head of global FX strategy at IronFX Global, pointed to Carney’s comments nearly two weeks ago that “the most likely next move in monetary policy is an increase in interest rates”.

“If they maintain their tightening bias as seen in the Bank’s inflation report, this could be sterling-positive,” he added.

Carney’s comments and recent upbeat economic data have led to a steadying of rate hike expectations — after they were pushed back by more than a year. Investors are pricing in the chance of the first rate hike by the BoE (Shenzhen: 200725.SZ – news) in early 2016.

With almost all major banks forecasting more losses for the euro as the European Central Bank embarks on quantitative easing, the pound looked likely follow the dollar higher this week if testimony by Federal Reserve chief Janet Yellen affirms expectations of a U.S. rate rise this year.

Petr Krpata, currency analyst at ING said that any clarification from the BoE on the timing of the first rate hike, could see euro/sterling drop to 73 pence. (Reporting by Anirban Nag; Editing by Andrew Heavens)

US and UK rate hikes to drive euro further south

The euro has lost considerable ground since last spring as the persistence of very weak growth in the eurozone, coupled with a fall in inflation to very low levels, forced the ECB into further policy easing moves.

It has also become increasingly clear that while interest rates are likely to rise, albeit modestly, in the US and UK over the next couple of years, they are set to remain pegged at virtually zero in the eurozone for a prolonged period.

The euro fell from $ 1.40 last May to close on $ 1.20 by the end of 2014. Against sterling, it declined from a high of 84p in early 2014 to 78p at the end of the year. These trends continued in the opening weeks of 2015, with euro weakness gathering momentum on the back of the ECB announcement of a full-blown QE programme.

The currency is down around 5% against both the dollar and sterling since the start of the year. It fell through critical support levels near $ 1.18 against the dollar and is now trading at around $ 1.14. Against sterling, it has fallen below 74p after major support at 78p gave way.

Another noticeable feature of FX markets in early 2015 has been increased volatility, in part, related to central bank policy changes. The Swiss National Bank caught markets completely off guard with the shock decision to discontinue its policy of capping the franc’s exchange rate against the euro, resulting in a sharp appreciation of the currency.

Meanwhile, surprise easing announcements from Central Banks, such as the Bank of Canada, Reserve Bank of Australia and the Swedish Riksbank, have resulted in weakness for their currencies. The euro has also been volatile enough, recently. It fell to as low as $ 1.11 in January, before edging back to trade in a $ 1.13-$ 1.15 range recently. The uncertainties about Greece, negative eurozone inflation, and QE have all been negative factors weighing the single currency.

Changes in expectations about when we will start to get rate hikes in the US and UK have also been impacting markets, which have become particularly sensitive about labour market data in both economies. In our view, if expectations for a US rate hike by around mid-year prove correct, then the dollar is likely to continue to move higher.

Important upcoming events in this regard are Federal Reserve chairwoman Janet Yellen’s bi-annual testimony to Congress this week and the next Fed policy meeting in mid-March. The expectation is that the Fed may signal that a rise in US interest rates is increasingly likely at one of these events.

The euro-dollar rate could test support levels at around $ 1.10-$ 1.11 before the end of March on any Fed tightening signals. It could then move lower to around the $ 1.05 level later in the year, if US rate hikes materialise. With the Fed expected to raise rates by mid-2015, pushing the dollar higher, sterling traders will face an interesting question: Should sterling also continue to move higher against the euro? In our view, US rate hikes would strengthen the view that UK rates will also have to eventually rise.

If expectations of even modest rate hikes in the UK remain intact, the currency should appreciate further against the euro. Hence, we see the euro-sterling rate heading towards 70p over the course of 2015. We expect sterling to remain fairly stable against the dollar at close to $ 1.50. An important risk to bear in mind for sterling, though, is a result in the UK general election that markets view as negative for the currency. The outcome of the election is unclear. It could result in an unstable, minority government. It is also unclear whether there will be a referendum on the UK’s continued membership of the EU. These issues have the capacity to cast a cloud over sterling this year.

Banking giant predicts sterling set to soar against euro

British holidaymakers and property buyers could be lording it on the continent over the next few years if sterling is set to soar against the euro as a City report forecast today.

Investment banking giant Goldman Sachs reckons sterling’s strength against the euro is set to continue into next year and could reach highs of €1.54 to the pound by 2017 – a level last seen in 2000.

That would mean a euro was worth just 65p compared to just over 79p – or €1.26 to the pound – currently. At that rate British second-home seekers would once more be flocking to snap up cheap properties in France, Italy and Spain.

Full steam ahead: British holidaymakers can look forward to cheap holidays on the Continent in the years ahead as the pound looks set for continued rises against the euro

The pound has made steady but unspectacular gains versus the single currency over the last year or two and currently stands two cents off its recent high of more than €1.28.

Goldman said the US dollar is also set for a rise as the American economy powers ahead and interest rates rise steeply.

The report sees the dollar touching parity against the euro and climbing to 140 Japanese yen. ‘We are in a multi-year phase of a US dollar recovery. The market may be underestimating the scope and persistence of that trend,’ it said.

In a possible taster of Goldman’s predictions, the euro took a tumble today after European Central Bank head Mario Draghi hinted that he could launch quantitative easing style stimulus early in the new year as the ECB tries to spur growth in the eurozone.

The remark saw the euro fall sharply against the dollar, dropping 0.8 per cent to $ 1.2437, and 1 per cent against the Japanese yen.

Steady gains: The pound currently stands two cents off its recent high against the single currency of €1.28 and analysts at Goldman Sachs predict the rate will go back to the good old days of €1.54 by 2017

Goldman’s goes on to say in its outlook that the euro will drop to 0.65 against the pound by 2017, significantly below the 0.85 predicted in previous reports. Capital inflows rather than trade effects are driving this strength, it added.

The last time British sunseekers benefited from such spending power on the continent was in the period 1999-2002 when Germany’s economy fell into a deep slump and the Neuer Markt for hi-tech stocks collapsed.

A strengthening pound would suggest the UK economy is back on track and set for sustained growth over the coming years. Yet there are signs the exchange rate is overvalued with the International Monetary Fund estimating the pound is 5 to 10 per cent too strong at current levels.

The British economy still has the worst current account deficit in the developed world, running at 5.2 per cent of GDP in the second quarter. GDP growth came in at 0.7 per cent in the third quarter this year – which was better than France and Germany – but still lagging behind the US.

‘The current account deficit is probably the worst in history,’ said David Bloom at HSBC. ‘We have only three problems with sterling: cyclical, structural, and political; and we don’t really believe in this recovery.’

‘We think that whatever infects the eurozone also infects Britain. They feed into each other and that is why we think sterling will go down with the euro. The dollar is the only rose between these two thorns,’ he added.

Living the dream: British buyers looking for Tuscan farmhouses are to soar as holidaymakers seek out bargain prices on the Continent

Goldman Sachs added that US economic expansion has ‘several years to run’ and will drive another long phase of global growth.

The S&P 500 index of Wall Street stocks will rise to 2,300 by 2017, the Stoxx Europe 600 index will rise to 440, and the Japanese Topix wil hit 1,900, so bask in sunlit uplands and enjoy.

It also predicted the US Federal Reserve will not raise rates until September of next year, later than the markets currently expect.

Goldman: Pound to hit 15-year highs against the euro

We are in a “multi-year phase of a US dollar recovery” and markets are underestimating the power of the trend

Sterling is to climb relentlessly against the euro over the next three years and will reach levels last seen at the turn of the century, according to new forecasts by Goldman Sachs (NYSE: GS-PB – news) .

The US investment bank said the dollar will rise even faster as the American economy powers ahead and interest rates rise steeply, touching parity against the euro and climbing to 140 Japanese yen. The Brazilian real will tumble to 3.10 as the commodity boom continues to deflate.

“We are in a multi-year phase of a US dollar recovery. The market may be underestimating the scope and persistence of that trend,” it said.

The euro will drop to 0.65 against the pound by 2017, driven by capital inflows rather than trade effects. This approaches levels seen in the period from 1999-2002 when Germany’s economy fell into a deep slump and the Neuer Markt for hi-tech stocks collapsed. This is a dramatic revision since the bank’s previous forecast was 0.85. “Euro downside remains our top conviction view,” it said.

Goldman Sachs said the European Central Bank is still reluctant to buy sovereign bonds and launch full-blown quantitative easing but is likely to act more aggressively than markets expect when it finally does.

On an inverted basis, UK exchange rate would be €1.54 to the pound by 2017. This turn would Europe into a cheap region for holidays once again, and offer bargain basement prices for farmhouses in Tuscany or Aquitaine.

Yet such a dramatic rise in sterling cannot easily be justified by the underlying weakness of the British economy, which already has the worst current account deficit in the developed world. It was running at 5.2pc of GDP in the second quarter.

While part of this deficit is due to the economic relapse in the eurozone, it also suggests that the exchange rate is badly overvalued even at current levels. The International Monetary Fund estimates that the pound is 5pc to 10pc too strong.

The exchange rate follows the divergence in Interest rates

Cumulative inflation in the UK has been much higher than in the eurozone, without any improvement in relative productivity. A return to the euro-sterling exchange rate of fifteen years ago would imply a massive overvaluation, and could push the UK deficit towards 7pc of GDP.

“The current account deficit is probably the worst in history,” said David Bloom from HSBC. “We have only three problems with sterling: cyclical, structural, and political; and we don’t really believe in this recovery.”

“We think that whatever infects the eurozone also infects Britian. They feed into each other and that is why we think sterling will go down with the euro. The dollar is the only rose between these two thorns,” he said.

Euro/Sterling rate for the last 20 years

The Goldman Sachs (Xetra: 920332 – news) forecasts were contained in its predictions for 2015, a list that includes a “New Oil Order” as extra crude supply from Libya, Iraq, and Iran pushes prices even lower.

The bank said the US Federal Reserve will not raise rates until September of next year, later than the markets expect. But it will then move faster and on a steeper trajectory than widely assumed as it tries return to a “neutral” rate of 4pc. The report insists that this will be “manageable” for the world, invoking the curious argument that bond tapering has so far been benign and that Fed tightening will therefore continue to be so in the future.

The analysis of Fed policy almost certainly reflects the broad outlook of William Dudley, a Goldman Sachs economist before he became head of the New York Fed. He is one of the most influential figures on the voting committee. Mr Dudley’s views have tended to prevail over recent meetings and are tracked closely by analysts.

The latest Fed minutes played down concerns about the strength of the dollar, suggesting that the closed nature of the US economy makes it resilient against an exchange rate shock.

Goldman Sachs said the US economic expansion has “several years to run” and will drive another long phase of global growth.

The S&P 500 index of Wall Street stocks will rise to 2,300 by 2017, the Stoxx Europe 600 index will rise to 440, and the Japanese Topix wil hit 1,900, so bask in sunlit uplands and enjoy. Gold will go nowhere.

Goldman Sachs eyes sterling surge to 15-year highs against the euro

The exchange rate follows the divergence in Interest rates

On an inverted basis, UK exchange rate would be €1.54 to the pound by 2017. This turn would Europe into a cheap region for holidays once again, and offer bargain basement prices for farmhouses in Tuscany or Acquitaine.

Yet such a dramatic rise in sterling cannot easily be justified by the underlying weakness of the British economy, which already has the worst current account deficit in the developed world. It was running at 5.2pc of GDP in the second quarter.

While part of this deficit is due to the economic relapse in the eurozone, it also suggests that the exchange rate is badly overvalued even at current levels. The International Monetary Fund estimates that the pound is 5pc to 10pc too strong.

Cumulative inflation in the UK has been much higher than in the eurozone, without any improvement in relative productivity. A return to the euro-sterling exchange rate of fifteen years ago would imply a massive overvaluation, and could push the UK deficit towards 7pc of GDP.

Euro/Sterling rate for the last 20 years

“The current account deficit is probably the worst in history,” said David Bloom from HSBC. “We have only three problems with sterling: cyclical, structural, and political; and we don’t really believe in this recovery.”

“We think that whatever infects the eurozone also infects Britian. They feed into each other and that is why we think sterling will go down with the euro. The dollar is the only rose between these two thorns,” he said.

The Goldman Sachs forecasts were contained in its predictions for 2015, a list that includes a “New Oil Order” as extra crude supply from Libya, Iraq, and Iran pushes prices even lower.

The bank said the US Federal Reserve will not raise rates until September of next year, later than the markets expect. But it will then move faster and on a steeper trajectory than widely assumed as it tries return to a “neutral” rate of 4pc. The report insists that this will be “manageable” for the world, invoking the curious argument that bond tapering has so far been benign and that Fed tightening will therefore will continue to be so in the future.

The analysis of Fed policy almost certainly reflects the broad outlook of William Dudley, a Goldman Sachs econmist before he became head of the New York Fed. He is one of the most influential figures on the voting committee. Mr Dudley’s views have tended to prevail over recent meetings and are tracked closely by analysts.

The latest Fed minutes played down concerns about the strength of the dollar, suggesting that the closed nature of the US economy makes it resilient against an exchange rate shock.

Goldman Sachs said the US economic expansion has “several years to run” and will drive another long phase of global growth.

The S&P 500 index of Wall Street stocks will rise to 2,300 by 2017, the Stoxx Europe 600 index will rise to 440, and the Japanese Topix wil hit 1,900, so bask in sunlit uplands and enjoy. Gold will go nowhere.