Strategists Support Higher Pound Against Euro

– GBP / EUR in recovery mode
– Gains helped by market recovery
– EUR weighed by the ECB
– Soc Gen returns GBP / EUR above 1.20
– CBAs are buyers of GBP against EUR

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The British Pound is expected to appreciate against the Euro over the next few weeks by a number of forex strategists we are following, one suggesting that levels of 1.25 cannot be expected.

Strategists of the investment banking divisions of Societe Generale, ING Bank and Commonwealth of Australia Bank confirmed this week that they expect the pound sterling to rise further against the euro, noting a combination of favorable valuations and interest rate differentials.

The calls come at a time of heightened volatility in the forex markets which saw the pound fall sharply against the euro and dollar earlier in the week before finally recovering those losses in subsequent sessions.

The pound has entered this phase of recovery aided by signs that the third wave of Covid hitting the UK may slow as a stock market rebound has appealed to the ‘high beta’ personality of the UK currency .

Still in deficit

Above: Despite a recent rally, the GBP continues to absorb losses over a one week period.

The rebound against the euro accelerated on Thursday after the European Central Bank (ECB) said it would maintain generous levels of monetary support to the eurozone financial system until inflation stabilizes around the 2.0% level.

The position suggests that the ECB will remain one of the laggards in the race for global central banks to normalize interest rates to pre-crisis levels, a position that could weigh on the euro in the long run.

The ECB’s position of doing nothing contrasts with that of the bank of england which seems increasingly nervous about inflationary levels in the UK, reflected by the fierce debate among policymakers over whether or not inflation will stay above 2.0% for an extended period.

Money market prices show investors expect the Bank of England to hike interest rates in 2022, while markets are expected to hike rates in 2024.

Some economists say the take-off at the ECB could be even later.

“The new forward guidance is in line with our expectations that rates will not be raised in the euro area until the end of 2025,” said Giovanni Zanni, chief euro area economist at NatWest Markets.

Zanni says it will be time before the ECB’s inflation forecast for the coming year matches the ‘2% sustainable’ target, “in fact not until late 2024 – early 2025, according to our expectations “, he adds.

The policy divergence between the two central banks is reflected in the sterling’s steady uptrend against the euro in 2021, which remains intact despite the wobble seen earlier this week.

Rate of the pound to the euro in 2021

Above: Daily chart showing GBP / EUR behavior in 2021.

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According to Société Générale, the French international financial services provider and investment bank, the exchange rate of the pound against the euro could go well above 1.20 by the fall.

Soc Gen has updated its exchange rate forecast and says the US dollar has bottomed and the British pound is acclimating to a new post-Brexit era.

“The EUR / GBP seems to us to have entered a post-Brexit era and is following rate differentials and growth expectations with a little more confidence now. The chart shows how this has been since the attention was drawn. the referendum vote itself. The EUR / GBP diverged from yields and climbed in 2019 as the EU departure date approached and the domestic political backdrop darkened, “said Kit Juckes, Chief Foreign Exchange Strategist at Soc Gen in London.

Soc Gen chart

“Since the initial COVID-related volatility subsided, the two lines of the graph have moved harmoniously. On that basis alone, the likelihood that the UK will tighten monetary policy well ahead of the ECB suggests that the EUR / GBP is now more likely to drift towards 0.80 than up towards 0.90, ”says Juckes.

0.90 in EUR / GBP equals 1.11 in GBP / EUR and 0.80 gives a GBP / EUR exchange rate of 1.25, a target that Juckes expects the exchange rate to gravitate towards this. fall.

Analysis by Amsterdam-based international banking giant ING Bank shows that the pound has remained undervalued by a recent decline against the euro, as the EUR / GBP is now at its highest level since April.

“The latest GBP sell-off brought EUR / GBP into the most overvalued territory since April, with EUR / GBP currently 1.5% overvalued (which is just below the standard deviation band of 1.5) based on our short-term financial fair value model, ”says Petr Krpata, Chief EMEA FX and IR Strategist at ING in London.

EUR / GBP hit a high of 0.8669 on Monday (GBP / EUR down to 1.1535) amid a massive selloff in global markets that pushed the pound lower. Investors sold the pound and bought euros as fears increased over the impact of the rapidly spreading Delta variant of Covid-19 on the global economic outlook.

However, a subsequent stabilization of sentiment combined with an apparent overvaluation of the euro against the pound sterling leads ING to expect a reversal of the euro’s gains.

ING’s modeling suggests that there is limited scope for EUR / GBP to move above the 0.8700 level (GBP / EUR below 1.1494).

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Despite favorable valuations for the pound sterling, ING remains cautious about a further rise in tensions between the EU and the UK over the issue of the Brexit protocol in Northern Ireland.

Although Brexit took place in January, the protocol is still not fully functional given the significant technical challenges it poses.

Heightened cultural sensitivities also prevent its full implementation, with the Unionist community opposing a perceived separation of Northern Ireland from the rest of the UK.

The British government said on Wednesday it was seeking a substantial renegotiation of certain points contained in the Northern Ireland Protocol, adding that in its current form it was preventing trade in goods and medicines between Britain and the United Kingdom. ‘North Ireland.

Brexit Minister David Frost told the House of Lords that the government is now proposing a number of major changes to the protocol, which the EU has flatly rejected.

In fact, the EU said on Thursday that it intends to step up legal action over the matter.

If the two sides fail to agree on a lasting solution to the issue before the current grace period expires on October 1, tensions may soon begin to reflect on the pound’s exchange rates.

A shock is coming, “this suggests that the return of the pound to its fair value in the short term is not imminent,” says Krpata.

European Commission President Ursula von der Leyen said on Thursday that the EU would nonetheless remain open to finding solutions to the problem.

Boris Johnson called for the presentation of the British command document on the Ireland / Northern Ireland protocol. The EU will continue to be creative and flexible under the protocol. But we will not renegotiate. We must jointly ensure stability and predictability in Northern Ireland, “he added. she said in a brief statement.

History suggests that tensions between the EU and UK tend to escalate before an inevitable breakout and markets will therefore choose to watch through the noise for now.

Indeed, Commonwealth Bank of Australia strategists believe the pound is a solid bet against the euro.

In a regular currency briefing on July 22, they maintain the buying of the pound, and the selling of the euro is the only conviction appeal remaining on their books.

Like ING, CBA considers that the valuation favors the gains of the pound.

“The valuation and relative economic performance between UK and Eurozone are the reasons we continue to expect EUR / GBP to decline. UK CBI business optimism fell in July but remains in line with strong economic activity over the next three months, ”said strategist Elias. Haddad at ABC.

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