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Expect the British Pound to appreciate in value from current levels, however any future gains are unlikely to be as rapid as those witnessed in the first half of the year.
This is the message from foreign exchange analysts at Rabobank, the Dutch-based international financial services provider and investment bank who tell clients the UK's economic recovery looks to be taking hold.
"Now that many of the longs positions that were built in the pound during Q1 have been shaken out, it would appear that GBP bulls may be re-grouping," says Jane Foley, Senior FX Strategist at Rabobank, in a recent research note.
The Pound rallied sharply at the start of this week, leading to budding expectations that the theme of GBP outperformance that characterised January, February and March was making a return.
However, a subsequent capitulation linked to a turn lower in global markets scuppered this bullish sentiment and served a reminder that the road higher in foreign exchange is never a smooth one.
Nevertheless, looking through the near-term noise, Rabobank note that the UK's vaccination programme remains on target to deliver the government's objective of vaccinating all adults by July.
"The pace of vaccinations is again rising following a slowdown at the start of this month," says Foley.
Image courtesy of @UKCovid19Stats
The vaccination programme has allowed the UK to pursue a slow, albeit clearly signposted, route out of lockdown that provides businesses, investors and consumers with some confidence that this unlocking is a sustainable one.
The UK was fast to commence a programme of inoculating its population that lead markets to bet it could steal a march on other economies when it comes to reopening.
With over 60% of the adult population having now received at least one vaccinated, and a third of these now fully vaccinated, the reopening process remains on track and the data must now reflect the dividends of the vaccination drive.
"Support for the pound has come from anecdotal evidence highlighting an encouraging picture from freshly re-opened UK businesses," says Foley.
Foley's call comes ahead of Friday's PMI data for April that will offer the first significant survey of the UK's economic performance since major restrictions were lifted on April 12.
Expectations for a strong reading have risen, prompted by indications that the economy is rediscovering its feet with Google mobility data showing a sharp rise in activity.
While the data continues to show that mobility around venues such as restaurants, cafés, shopping centres, theme parks, museums, libraries and cinemas in the UK remains significantly below the pre-pandemic baseline, last week also brought a marked improvement from recent levels.
GBP/EUR Forecasts 2021
Period: Q2 2021 Onwards
GBP/USD Forecasts 2021
Period: Q2 2021 Onwards
Current activity is 30% below the pre-pandemic baseline measure which compares with a recent low of closer to 70%.
Rabobank are expecting the improving economic picture in the UK to ultimately keep Sterling exchange rates supported.
"While we are forecasting further gains for the pound in the months ahead, we do expect the pace of the to be slower that than seen at the start of the year," says Foley.
A potential speed limit to any future ascent is provided by the improvement in vaccination rates elsewhere, particularly in the Eurozone.
"Not only is there a lot of good news priced into the pound but there is likely to be some degree of ‘catch-up’ in the vaccine rollout in the EU," says Foley.
Rabobank are forecasting the Euro-to-Pound exchange rate (EUR/GBP) to be at 0.85 on a 3 month view.
This gives a Pound-to-Euro exchange rate of 1.1765.
Rabobank are assuming the U.S. Dollar can recover some ground into the summer and thus they look for GBP/USD to trade in a 1.38-1.40 range in the coming months.