Pound-Euro Rate's Road to 1.15 will be Rocky: Rabobank

- GBP/EUR forecast higher in 2021 by Rabobank
- But, pullbacks are expected
- Call comes as GBP/EUR retreats from highs
- Political, economic pitfalls could trip up GBP

Above: Michel Barnier, EU Chief Negotiator is leading talks with the UK over financial services access. Copyright: European Union.

Pound Sterling might be one of 2021's star performers, but the currency faces hurdles over coming months and will be liable to setbacks according to one of Europe's major lenders.

Analysis from Rabobank - the Dutch-based financial services provider - shows that while the Pound is expected to rise in value against the Euro over coming weeks and months, the exchange rate will suffer pullbacks.

But the Pound lost value against the Euro, Dollar and other major currencies in the second half of the past week amidst a bout of profit taking on the currency's 2021 rally, in a move confirming the path forward is likely to be anything but straight.

Jane Foley, Senior FX Strategist with Rabobank in London, says there could well be a political element to the pullback.

"Headlines are providing a dose of relativity on the tense relationship between the EU and the UK and also on the speed that the UK economy can re-open this year."

• GBP/EUR spot at time of writing: 1.1380
• Bank transfer rates (indicative guide: 1.1080-1.1160
• FX transfer specialist rates (indicative): 1.1266-1.1307
• More information on specialist rates, here

Foley cites headlines detailing renewed tensions between the EU and UK over the Northern Ireland protocol that has seen the UK request an extension to the grace period that governs the flow of goods from the rest of the UK to Northern Ireland.

The European Parliament has since said it was looking to delay ratifification of December's EU-UK trade deal, saying the decision is because the UK is dragging its healds over Northern Ireland.

"The testy relationship between the UK and the EU may have implications for other areas," says Foley. "The two sides are currently in talks about a ‘memorandum of understanding’ for the financial services sector amid reports that the City’s hopes for regulatory equivalence are dwindling."

The EU and UK are currently working on reaching a potential deal for financial services, given that the sector was excluded from the trade deal signed in December.

The UK is seeking to be granted EU 'equivalence', which would allow UK-based firms to conduct business in the EU and take onboard EU customers.

However, the Bank of England Governor Andrew Bailey on Wednesday warned that it looks as though the EU were not going to grant equivalence. Indeed, the EU's lead negotiator Michel Barnier told a business summit in Brussels the EU still needs further clarification from the UK before making a decision on financial services equivalence.

"There is speculation that the memorandum may only bring an agreement from the two sides to provide notification when regulation changes, which will fall well short of equivalence," says Foley.

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The talks on a potential deal for financial services comes on the same day that it is reported the UK has lost its crown to the Netherlands for equity trading volumes.

"Amsterdam ousts London as Europe’s top share trading hub," runs the headline of an article in the Financial Times on Thursday which details how the City of London now no longer oversees the majority of equity market trading in Europe. (Read: London Won't be Overtaken by Amsterdam Anytime Soon).

The news report details how an average of €9.2BN shares a day were traded on Euronext Amsterdam and the Dutch arms of CBOE Europe and Turquoise in January, a more than fourfold increase from December.

When the UK exited the single market, EU-based financial institutions were banned from trading in London because the EU had not recognised UK exchanges and trading venues as having the same supervisory status as its own.

We note here that while the headlines on equity trading volumes appear stark, London is by far and away still Europe's primary financial services hub. But the developments do nevertheless hint at a chinks in the sector's armour.

"Despite the market’s relief that the UK and the EU managed to strike a trade deal in December, it is becoming obvious that Brexit is casting long shadows," says Foley.

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The British Pound's strong performance in 2021 is in part driven by the country's rapid vaccine roll out, according to numerous analysts we follow, a development that could yet yield further upside.

The assumption being that a swift vaccine rollout will yield a herd immunity to covid which will in turn allow for the economy to be opened on a sustainable basis.

Those country's that reach this golden milestone would typically be expected to outperform the laggards from an economic perspective.

However, Foley points out that the UK government is showing a nervousness on reopening, and this could prolong the economic impact of the crisis and potentially erase any outperformance benefits.

"Any continuation of restrictions on parts of the economy into the middle of the year will have a drastic impact of growth expectations," she says.

Rabobank are nevertheless forecasting the Pound to walk its way higher from current levels and are forecasting the Pound-to-Euro exchange rate to rise to 1.15 in the medium term.

But, "looking ahead we continue to see both political and economic hurdles for GBP and anticipate a fairly rocky ride in the coming months," says Foley. "We see scope for pullbacks into the spring before this level is held."