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Pound Sterling: "Good Time to Bet on a Break Higher" Against the Euro says Analyst

- GBP/EUR breaking to new highs
- Underpinned by UK vaccination programme
- No month-end EU payments to provide further support

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  • GBP/EUR spot at publication: 1.1327
  • Bank transfer rates (indicative guide): 1.1030-1.1110
  • FX transfer specialist rates (indicative): 1.1200-1.1240
  • Learn more about specialist rates available to you, here

The British Pound retains a positive near-term impulse that could net fresh highs over coming sessions, with foreign exchange markets looking to the potential for a sustainable exit from a cycle of economy-breaking lockdowns in the spring.

Sterling endured a setback towards the middle of the week but then recovered through Thursday as currencies reacted to the ups and downs in global equity and commodity markets, confirming the growing importance of the global picture for the UK currency.

The near-term outlook for the Pound will therefore likely depend on how broader markets trade, and whether the rebound can extend or whether the dip seen on Wednesday reestablishes.

But another key driver for the UK currency, particularly relative to the Euro, is the UK's vaccination programme which continues to suggest a more sustainable exit from lockdown in the UK could start occurring from March onwards.

The vaccination story is the one source of support for Sterling exchange rates that could well limit any downsides posed by stock market jitters.

Pound is 2021s best performer

Above: The Pound is 2021'a best performing major currency.

The Pound-to-Euro exchange rate has risen by two-thirds of a percent in the past week, delivering a new 8-month high at 1.1347, and in the process extends a trend of appreciation that has been in place since December 0.7.

This trend can extend, we are told.

"We are seeing some significant technical levels being breached in Sterling’s major currency pairs. A long standing technical resistance level of GBP/EUR 1.1280 has been broken to the upside, and for GBP/USD 1.3712 as the resistance level breached," says Joe Tuckey, Analyst at foreign exchange brokers Argentex.

Pound-Euro resistance

Above: GBP/EUR is in the process of breaking a long-term resistance.

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“After some recent strong sessions helped by positive sentiment surrounding the UK’s vaccination efforts, GBP has been further buoyed this week by better than anticipated labour market data which, while highlighting a rise in unemployment to 5%, was less gloomy than many feared," says Tuckey.

A break higher into a new range appears to be the odds-on outcome of the current technical battle in the Sterling-Euro market, says another analyst.

"The pound is pushing the upside limits of ranges that have held since last June. It's a good time to bet on a break higher," says Jeremy Boulton, a Reuters market analyst.

Boulton explains, "there have been some big changes that favour a rally. The pound has traded positively since Brexit, an event long feared, and that alone is cause to eye a break higher. The split will have another big influence on the pound that's imminent."

The analyst says month-end typically saw the UK payments to the European Union take place, with the Pound-to-Euro conversion creating a demand for Euros.

These payments ensured a steady and dependable month-end demand for euros that could ultimately limit Sterling's upside potential.

"That won't happen this month, which means there's a lack of support when EUR/GBP is testing major support levels," says Boulton.

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These levels are identified as the 100- and 200-week monthly average, located at 0.8840 and 0.8836 for EUR/GBP says the analyst, adding: "the 21-month monthly average is 0.8846 and peak of a thick monthly Ichimoku cloud is 0.8833. Closing breaks would open big downside potential. The cloud base is 0.8169."

From a Pound-to-Euro perspective, the 100- and 200-week moving average identified on EUR/GBP in the above translates into 1.1312 and 1.1317. The 21-month moving average is at 1.1300, the peak of the cloud is at 1.1321.

As can be seen, there is a substantial layer of technical resistance in the market that Sterling bulls must overcome.

"Traders are hugely long EUR but hold few bets on pound rising – making them badly prepared for a break," says Boulton.

Foreign exchange strategists at Credit Suisse see a breakout occurring, but a more concerted push by the UK currency is only tipped to rise towards the end of the first quarter.

"GBP could yet end up making a push for the 0.87-0.88 EURGBP target range we had looked for after a Brexit trade deal with the EU, but with momentum picking up later this quarter," says Shahab Jalinoos, lead currency strategist with UBS.

A 0.87-0.88 target on EUR/GBP translates into a 1.1494-1.1363 upside target in GBP/EUR.

"If the UK is successful in muting the current Covid spike and meeting its aggressive vaccination targets, it could yet emerge among the quickest countries to reach herd immunity, perhaps as soon as by the summer," says Jalinoos. "If so, the prospects for H2 2021 would look very strong, especially as house prices are already buoyant and could remain so with the right tax policy at the 3 Mar budget."