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RORO Keeps Pound Sterling Under Pressure Against Euro, But ECB to Provide a Safety Brake

- GBP/EUR could reach 1.1450 says one analyst
- GBP sold amidst Delta variant fears
- But ECB meet could offer near-term relief

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  • GBP/EUR reference rates at publication:
  • Spot: 1.1570
  • Bank transfers (indicative guide): 1.1260-1.1350
  • Money transfer specialist rates (indicative): 1.1470-1.1490
  • More information on securing specialist rates, here
  • Set up an exchange rate alert, here

The British Pound has now fallen for five days in succession against the Euro with foreign exchange markets selling the UK currency in conjunction with a dip in global market sentiment, although Thursday's European Central Bank meeting might offer some near-term stability.

Risk-on / risk-off patterns (RORO) have come to dominate markets over recent days with risk-on assets such as stocks and commodities falling as investors take fright over the global jump in Delta cases.

In times of significant drawdowns in global markets the Pound tends to fall against 'safe haven' assets, such as the Dollar, Yen, Franc and Euro.

"RORO has become increasingly dominant again. For much of the last year, that dominance has been GBP-positive but current fears (however fleeting) are keeping GBP on the back-foot," says Daragh Maher, Head of Research, Americas, for HSBC.

The Pound-to-Euro exchange rate (GBP/EUR) fell to its lowest level since May 10 at 1.1535 on July 20, having been as high as 1.1758 just law week.

"The euro is deemed another safer currency compared to the pound, which is why GBP/EUR has fallen to a 3-month low this week, back under the €1.16 mark. Volatility in this currency pair was anchored near 10-year lows last month, but this wave of risk aversion has injected some life into the pair," says George Vessey, a strategist at Western Union Business Solutions.

Pound to euro under pressure

FX transfers: Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more. (Advertisement).

Those who have FX payment requirements and set orders to hit at 1.1700 - a popular target for those setting alerts with Pound Sterling Live - would therefore likely have seen their wishes filled when the spot market approached the 1.1740-50 region.

Can the Pound return to such levels anytime soon or are those looking for a stronger Euro in for even better exchange rates?

Five days of declines have damaged the GBP/EUR's uptrend on a technical basis and at the very least investors must overcome their concerns over the Delta variant before the exchange rate stabilises.

"The vaccine euphoria - the hopes that the vaccine would end the pandemic and we’d soon be back to normal - is fading," says Marshall Gittler, Head of Investment Research at BDSwiss Holding Ltd.

"On the contrary, a return to normal could be much further away than people had thought, especially if the problem continues into the winter when people in the northern hemisphere spend more time inside and the virus has more chances to spread," he adds.

Covid cases rising globally

Cases of Covid-19 are rising right across the world, but it is Emerging Market economies that are more prone to disruption given their low levels of vaccination relative to Developed Markets.

Many Developed Markets will likely opt to see through the noise of rising cases and bet their vaccines will limit hospitalisations, as the UK is doing.

Nevertheless, markets face a tricky summer over Delta-related anxieties and this could prove unhelpful to those looking for firmer Pound exchange rates.

"To make matters worse, this new wave comes as fiscal and monetary support for the economy is being withdrawn – oh and inflation is rising too! The word stagflation, which was a theme in the late 1970s, is being bantered about again: a stagnant economy and inflation, an intractable combination of problems," says Gittler.

However, foreign exchange market participants will be loathe to rush into the Euro at the expense of the Pound with Thursday's European Central Bank (ECB) meeting so close.

The meeting will be of heightened interest to markets given it is the first following the recently announced policy review.

As a result of the strategy review the ECB will be required to recalibrate its language, objectives and targets, therefore the potential for surprises and volatility in Euro exchange rates is elevated when compared to previous meetings.

Should ECB President Lagarde and her team strike a particularly dovish tone, the Euro could burn those who have been buying EUR/GBP.

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"Overall, ECB Christine Lagarde is likely to lean dovish. Investors might be disappointed if they expect major adjustments to the ECB’s forward guidance. Given the rapidly changing economic outlook due to the spread of the Delta variant, which is now the dominant strain in most member countries, and the risk of upside inflation surprise, there is a material risk that the ECB will delay any policy announcements until it has more data available after the summer season," says Christopher Dembik, Director at Saxo Bank.

However, expectations for the ECB to strike a 'dovish' tone are relatively universal in the analyst community ensuring the bar set for Lagarde and her team is relatively low.

Therefore should the ECB meet expectations the Euro could find some buying interest as investors give a sigh of relief.

By the same token, any unexpectedly 'hawkish' tone - intentional or not - from the ECB could trigger more concerted buying which would put GBP/EUR on course for February lows.

"If the downtrend gains traction amid new wave fears and rising inflation and peak reflation worries, then GBP/EUR could slide towards the next key support located at €1.1450. A weekly close below that level increases the risk of a deeper downtrend," says Vessey.

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