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Pound-Euro Rate Week Ahead Forecast: Supported at 1.10

- GBP supported amid vaccine rollout & USD stabilisation.
- But BoE outlook, negative rate chatter poses risk early on.
- GBP faces initial resistance at 1.1111, then 1.1220, 1.1280
- 1.10 marks initial support as 1.0940 limits GBP's downside.

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  • GBP/EUR: spot rate at time of writing: 1.1085
  • Bank transfer rate (indicative guide): 1.0790-1.0870
  • FX specialist providers (indicative guide): 1.0980-1.1000
  • More information on FX specialist rates here 

Pound Sterling has pared earlier declines against the Euro and may draw support in the coming week from an acceleration of Britain's coronavirus vaccination programme, although international factors and Bank of England (BoE) monetary policy may also be important themes.

The Pound-to-Euro exchange rate has opened the new week softer and is at 1.1085 at the time of this article's update.

Sterling lost a percent of its value against the Euro last week, as the market swiftly shifted focus from Brexit developments and back to UK fundamentals where sentiment has taken a blow following the announcement of a third major nationwide lockdown aimed at squashing the spread of covid-19.

Those declines made Sterling the worst performing major currency for 2021 already, although the Pound-Euro rate was quick to catch a supportive bid when Tuesday's sell-off brought it into contact with the 1.10 threshold, from which it's since bounced. 

"While we still see room for EUR/GBP to mildly drop below the 0.9000 level [GBP/EUR up to 1.11] this should be limited given the rising risk of further BoE easing," says Petr Krpata, chief EMEA strategist for FX and bonds at ING. "The build-up of rate cut expectations (following the third lockdown) offsets the positive effect the UK-EU trade deal."

However, GBP/EUR recovered through the second half of the last week amidst a widespread stabilisation of the U.S. Dollar and also positive developments in Britain's vaccination drive which could continue to support Sterling this week. 

The UK may be just weeks away from sustained declines in hospitalisations and mortality given government plans to have 15 million and all of the most vulnerable vaccinated by mid-February, which could enable a prolonged relaxation of restrictions.

Above: Pound Sterling performance against major currencies thus far in 2021. Source: Pound Sterling Live. 

"We still have weeks to go before vaccines will start reducing COVID deaths and, some weeks later, the number of people being hospitalised. We cannot afford to let our justified optimism for the future come at the expense of difficult action today," says Chris Whitty, chief medical officer, in a Saturday statement. 

Prime Minister Boris Johnson said Thursday that 1.25 million had received vaccinations and that by February 15 close to a quarter of the population will have had an opportunity to be vaccinated, just days after announcing another national shut-in that is set to be reviewed around the middle of next month. 

Details of how soon such a task could be completed have been sparse thus far but the UK has the largest vaccine stockpile in the world after Canada so could be first in having the population inoculated. 

Vaccination progress is supportive of the Pound over the medium-term because it assures the economy a headstart in any global recovery.

"This is potentially a relatively bullish story for GBP, if the UK keeps outpacing peers," says Andreas Steno Larsen, chief FX strategist at Nordea Markets.

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It may also dispel recent market fears about a possible Bank of England decision to cut interest rates below zero later this year, fears which could be brought back to the fore on Monday by Monetary Policy Committee member Silvana Tenreyro.

Tenreyro leads an online discussion of "the international evidence of the transmission of negative interest rates," at 10:00 on Monday, a subject the BoE has been investigating for months. The bank has been assessing the prospective merits of a negative rate policy and has previously said it will set out findings when the decision from its next meeting is announced on January 28.

The Pound-to-Euro exchange rate resisted attempts to push it below 1.10 last week so may be likely to find support around there again in response to any further losses over the coming days, although technical analysts at Commerzbank have warned of a decline as far as 1.0940 in the short-term.

"The market’s recent spike down to .8907 was short lived and this suggests further upside probes are likely to be seen this week," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, referring to EUR/GBP and a level equivalent to 1.1227 for GBP/EUR. 

 Above: Pound-to-Euro rate shown at daily intervals. 

The Commerzbank team have a positive outlook for the Pound over a multi-month horizon, flagging scope for a rally as far as 1.1679, although they've warned of declines that could take it as far as 1.0940 over the coming days. Sterling otherwise faces resistance at 1.1111, 1.1227 and 1.1280 above there.

International developments will also be a key influence on the Pound in the coming week and especially if rising U.S. bond yields continue to the lift the Dollar. The Euro has risen further against the greenback than Sterling in recent weeks and could be more sensitive to any improvement in U.S. yields.

"The first week’s FX trading of the year provides a mini-version of what we except for the year as a whole. The global upswing story remains prominent, boosted by the Democrats gaining control of the US Senate and the continued rollout of the COVID-19 vaccine. Risk on G10 currencies are strongest," says Daragh Maher, head of U.S. FX strategy at HSBC. "GBP is the underperformer so far, and we expect the currency’s struggles to persist. The first week’s price action also is consistent with our view that while the USD may be on the defensive, any weakness will likely have its limits as we view this as a cyclical USD reaction to the global upswing rather than a structural USD bear story. It is interesting how tapering talk, which has arrived rather early, though is still in its infancy, is already giving more strident structural USD bears pause for thought." 

Several of the BoE's Monetary Policy Committee members will also deliver speeches this week, which could garner more attention than usual as the market assesses the risk of an experiment with negative interest rates.

Among them are members Silvana Tenreyro, who will address the topic directly at 14:00 on Monday before Ben Broadbent tackles "Covid and the composition of spending" at 10:00 on Tuesday.

In addition. November's GDP data is due out on Friday, where economists are looking on average for a -4.4% fall as that month saw a toughening of coronavirus-related restrictions when businesses in the hospitality sector were asked to close again. The data is out at 07:00 on Friday. 

 Above: Pound-to-Euro rate shown at weekly intervals.  

  

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