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Part of this wide swing in the GBP to EUR exchange rate could be attributed to monetary policy in the UK, which influenced the pound’s strength against the euro. The UK adopted a quantitative easing program during this period, which increased the money supply and lowered the value of the pound value against the euro. The euro, on the other hand, did not subscribe to the same quantitative easing program during this time. As a consequence, the euro’s value strengthened against the pound between 2009 and 2013.
Financial analysts also cited rising government debt, as a increase in the ratio of public debt-to-GDP would further weaken the currency, particularly in the context of the European recession. In the first quarter of 2013, Moody’s downgraded the UK government’s debt to AA1 for the first time. The ratings agency cited stagnant economic growth in the UK and resulting reduction in tax revenues, which in turn would make it difficult for the government to reduce its debt-to-GDP ratio.
The UK’s current account deficit was also considered one of the highest in the developed world, leading experts to believe it would eventually have a negative effect on its economy. In 2015, Britain’s current account deficit is estimated to be at 5.2% of its GDP, still too high in the estimation of many analysts.
By late 2014 experts had revised their forecasts for the pounds’ value in a more optimistic light. This is partially due to continued economic stagnation in the eurozone and strong manufacturing reports out of the UK. In late February 2015, the GBP was trading 12% higher against the euro compared to the same point of 2014. This sets a positive tone for British economic growth, although some economists consider that the pound may be overvalued, which could lead to instability down the line.
While Europe struggles with Greek debt restructuring problems, a destabilising conflict in Ukraine and a recent slide into deflation, forecasts predict the pound will start another climb against the euro, one which is expected to last for the next several years. Goldman Sachs predicts that the pound to euro exchange rate will reach a level that has not been seen since the early years of the euro’s issuance. Although Goldman Sachs had originally forecast the pound to reach a value of €1.167 by 2017, analysts revised up their estimates in November; the bank now predicts that the pound will reach a value of €1.538 by year-end 2017, driven in large part by the an influx of capital into the UK and continued economic instability in the eurozone.
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