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Pricey Pound a Sell against the Euro and Norwegian Krone at TD Securities

Exchange rate strategy

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  • GBP/EUR market rate at publication: 1.1608
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Foreign exchange strategists at TD Securities - the Canada-based global investment bank - are looking to sell the Pound as the currency has started to appear vulnerable on a number of their models.

In a recent briefing to clients, strategist Mark McCormick says the Pound now "scores poorly on a number of our dashboard indicators," particularly in terms of positioning and valuation.

"In terms of thematic drivers, we note that the UK's solid progress on the vaccine front will support a growth rebound from Q2, while the lingering risks from a bad Brexit and negative policy rates have dissipated. At current levels, GBP has priced that in, while positioning looks extreme," says McCormick.

The Pound has been the best forming major currency of 2021, with analysts widely citing the UK's lead in the race to vaccinate its population against covid-19 as being an important factor.

The lifting of Brexit related uncertainties following the signing of the December EU-UK trade deal and the elimination of expectations for negative interest rates at the Bank of England have also contributed to improved performance.

Modelling GBP TD Securities

The progress on vaccines arguably feeds into the Bank of England expectations as a successful programme means the country will be able to exit lockdowns on a sustainable basis over coming weeks and months, opening the door to a potential recovery in economic growth.

Money markets are now suggesting the first interest rate rise at the Bank could come as early as 2022.

The UK's rapid rollout of the vaccine contrasts with the slower progress being made in the EU and the GBP/EUR exchange rate has risen 3.75% in 2021.

But the rally now leaves Sterling looking pricey and TD Securities are targeting a recovery in the Euro against Sterling.

Modelling by TD Securities

The UK currency "runs quite expensive against other major European currencies on our risk and growth framework," says McCormick.

The Norwegian Krone (NOK) is also tipped to outperform Sterling courtesy of its status as a leading beneficiary of a global economic rebound.

Research by TD Securities also suggests NOK trades at a discount to global growth and risk sentiment.

"The Norges Bank also looks like the only possible European hiking candidate," says McCormick.

Other analysts are in agreement.

"The Norges Bank remains the top candidate for the central bank likely to first hike key rates within the G10 universe," says Esther Reichelt, FX and EM Analyst at Commerzbank.

The analyst says the Norwegian economy proved more robust last year, meanwhile generally high inflation levels and concerns about financial stability as a result of significant price rises on the property market.

"The market considers a rate hike as early as the end of this year to be possible. That supports the krone," says Reichelt.

TD Securities are targeting a fall in the GBP/NOK exchange rate to 11.35, it is currently located at 11.86.

The EUR/GBP exchange rate is expected to reach 0.8975, which equates to a GBP/EUR decline to 1.1142.

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