Image © Adobe Images
- GBP/EUR: spot rate at time of writing: 1.1746
- Bank transfer rate (indicative guide): 1.1475-1.1517
- FX specialist providers (indicative guide): 1.1570-1.1664
- More information on FX specialist rates, here
- Set an exchange rate alert, here
The Pound-to-Euro exchange rate reached one-year highs this week, at or above which it's likely to remain in the months ahead, according to new forecasts from Rabobank.
Sterling has proven more resilient against a recovering Dollar than its European counterpart and many other peers in recent weeks, enabling the Pound-to-Euro as well as other Sterling exchange rates to rise, which culminated in GBP/EUR establishing a foothold above 1.17 this week.
The Pound-to-Euro exchange rate traded as high as 1.1771 on Thursday, its highest level since February 2020 following gains that reflected as much a depreciation of the Euro as they do a repricing of the Pound and its prospects.
But with Sterling having entered the year close to historic lows against many currencies including the Euro, only for the UK to then pull ahead of other major economies including the European bloc in the vaccination race, the Pound has recovered sharply this year.
"The GBP has been cautiously making headway vs. the EUR," says Jane Foley, head of FX strategy at Rabobank. "As recently as early February the market dialogue contained a discussion about whether the BoE would have to adopt a negative Bank rate. A less dovish than expected tone from the MPC in early February combined with the impressive rate of vaccinations in the UK has instead seen a switch towards speculation regarding the timing of the first rate hike."
Europe's single currency has been on the ropes in 2021 having quickly come under pressure in January from European Central Bank (ECB) concerns about the impact of exchange rate strength on its inflation target, only for Europe to then fall noticeably and meaningfully behind in the vaccination race.
Above: Pound-to-Euro rate shown at daily intervals with EUR/GBP (purple).
Procurement troubles have had Europe struggling to vaccinate even a fraction of the numbers seen each day in the U.S. and UK, while the bloc has also recently been overtaken by Canada in terms of daily injection numbers. In addition, and while restrictions on activity are easing in the UK and parts of the U.S., many European countries have been engulfed by a third wave of infections that has seen governments returning many of the continent's major economies to 'lockdown'.
"Fears that the authorities in the region are failing to contain the third wave of infections are coinciding with reports regarding the slow vaccine rollout in the Eurozone. Together these are undermining expectations regarding the economic recovery," Foley says. "We see scope for GBP to make a little more headway vs the EUR later this year, but after this year’s strong start, the pound is likely to see further setbacks along the way."
Vaccine troubles have set the European economic recovery back by months and cultivated a divergence of fortunes at the central bank level, which has given investors incentive to sell Euros in exchange for a range of other currencies including the Pound.
The ECB's March response to the ongoing sell-off in U.S. government bonds vindicated the market for having sold the Euro as a "funding currency" for wagers on more attractive assets this year, with the bank having "significantly" stepped up the pace of its government bond purchases to contain an increase in European yields, which came as a spillover from the U.S. sell-off but had tightened financial conditions in Europe.
Above: Pound-to-Euro rate shown at weekly intervals with selected moving-averages and EUR/GBP (purple).
The ECB acted to shield the Eurozone economy from rising bond yields just as the Federal Reserve (Fed) and Bank of England (BoE) expressed indifference to increases in theirs, in a pointed example of diverging interest rate prospects as well as clear indication of the likely trajectories ahead in certain exchange rates.
"The market’s excitement about the prospects for growth and inflation in the US suggests that this year’s USD rally may have further to run. On the back of this reason and given the additional covid related restriction in Europe, we have revised down our 3 month EUR/USD forecast to 1.17," Foley says. "While the GBP may continue to struggle vs. the USD in the current environment, we expect that it will remain well supported vs. low yielding G10 currencies such as the CHF, JPY and the EUR."
The Fed has emphasised that while it doesn't intend to lift its Fed Funds rate until at least 2023, it's content with American bond yields that have doubled at some durations this year, tightening financing conditions for companies and households. This is at the other end of the field when it comes to the ECB but is not dissimilar to the stance adopted by the Bank of England (BoE).
GBP/EUR Forecasts 2021
Period: Q2 2021 Onwards
FX for Businesses Guide
Period: Q2 2021 Onwards
The UK's earlier economic reopening begins in April and has enabled the BoE to sit back and observe a pending recovery, and investors to contemplate the likely timing of an initial interest rate rise, just as a third wave and so-far lumbering vaccine rollout darken and dirty the backdrop for the Euro. All of these factors and others were at work when Foley downgraded Rabobank's three-month EUR/GBP forecast to from 0.86 to 0.85 this week, which is a new three-month target of 1.17 in Pound-to-Euro terms.
"It is unlikely to be a smooth ride for the UK economy," Foley says. "This suggests choppy conditions ahead for GBP. That said, reflecting broadly held concerns that the Eurozone is lagging on the reflation front, we have adjusted out EUR forecasts lower vs. both the GBP and the USD.