The Pound to Euro exchange rate (GBPEUR) can extend its current rally over the coming days according to strategists at two investment banks.
Both Barclays (LON:BARC) and CIBC Capital Markets say it is too soon to fight the Pound’s current trend of appreciation, even if there remain persistent concerns over the UK’s growth outlook in light of elevated inflation and rising interest rates.
Analysts at Barclays say the Pound can remain supported against the Euro as long as the market continues to believe the Bank of England is in a position to ‘out hike’ the European Central Bank.
“Sticky UK inflation points in the direction of more hikes by the BoE. Although further tightening will ultimately weigh on growth, the UK’s current inflation problem is a symptom of resilient demand amidst tight labour markets and reduced aggregate supply, in our view,” reads a weekly currency strategy note from Barclays.
Strategists there say further tightening of UK interest rates will enhance the UK’s ‘carry’ advantage and afford some support to the Pound, “even as the bar for hawkish surprises versus market pricing remains too high”.
Barclays eyes a break in EURGBP below 0.8550 for the first time in almost a year as being a near-term prospect. This equates to an upside break above 1.17 in GBPEUR.
The call comes as the Euro to Pound (EURGBP) is quoted at 0.8576, giving a Pound to Euro conversion (GBPEUR) of 1.1660. The 2023 low is 0.8540 and the GBPEUR top is 1.1710.
Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets, says it is too soon to fight Pound Sterling’s advance against the Euro.
“The broad risk improvement allied to BoE tightening expectations has benefitted Sterling via its high beta status,” says Stretch.
Market-implied expectations showed investors were prepared for the Bank of England to raise Bank Rate to as high 5.75% this year, a level that would be significantly higher than where the ECB is likely to end its rate hiking cycle and some 40 basis points above where the Fed is expected to park interest rates.
Stretch says the uptick in UK earnings as reported on June 13 will further cement expectations for higher rates, even if economists at CIBC are unconvinced Bank Rate will rise to where the market expects.
The next data out of the UK falls on Thursday when GDP figures are expected to show the economy grew again in April, something that could aid the Pound to register further gains against the Euro.
“An expected rebound in April GDP, helped in part by improved weather, points towards the perpetuation of EUR/GBP downside,” says Stretch.
From a technical perspective, the analyst notes EURGBP has exceeded the early December low leaving open the prospect of the cross heading back towards 0.8454, this marks the 76.4% Fibonacci retracement of the 0.8203-0.9266 rally.
In GBPEUR terms this means a retest of 1.18 could be in the cards.
Much will however depend on the nature of Thursday’s European Central Bank (ECB) interest rate decision and guidance, where a further 25 basis points of hikes are expected to be delivered.
“We head towards this week’s ECB meeting, on the back of real money players having pared net EUR longs in the last three positioning snapshots. While a further 25bps hike is expected from the ECB, even the doves acknowledge further tightening is necessary,” says Stretch.
For the Euro, what matters will be the tone and language regarding future interest rates.
“If the ECB validates the presumption of a policy peak being reached by the time of the summer recess this would risk a further unwind in EUR positioning,” says Stretch.