Pound-Euro Exchange Rate Rally Pushes through 1.20

- Javid resigns
- Markets betting more government spending is coming
- GBP/EUR breaches 1.20
- Sustainability of the move higher questionable

Above: File image of Sajid Javid © Gov.uk, Foreign and Commonwealth Office.

- Spot GBP/EUR: 1.2049, +1.13%
- Bank transfer rates (indicative): 1.1675-1.1759
- Money transfer specialist rates (indicative): 1.1830-1.1880 >> More information here.

Pound Sterling has powered to record its highest level since December 16 against the Euro after it hit 1.2009 on Thursday, February 13 on the back of political developments in the UK and an ongoing souring in sentiment towards the Eurozone's single currency.

Markets are on Thursday digesting news that Chancellor of the Exchequer, Sajid Javid, has resigned. Javid was to be the author of the UK's expansion in fiscal policy, and his resignation is something of a shock. News reports suggest Javid quit as he was asked to drop a number of key aides and advisors in return for keeping his job, something he refused to do. It is believed the request for Javid to cull his team is a sign of intent by Prime Minister Boris Johnson's office to grab a tighter control of the Treasury.

His replacement is rising Conservative Party star Rishi Sunak, who is relatively new to the cabinet and therefore potentially malleable to Prime Minister Boris Johnson's vision for spending and taxation.

The market's initial reaction to the news is to keep the bids for Sterling flowing and the GBP/EUR exchange rate has topped at 1.2049 at the time of writing, up 1.14% which is a sizeable intraday move for this currency.

"The prospect of higher spending, fiscal stimulus is sterling positive," says Neil Wilson, Chief Market Analyst at Markets.com. "This is a blatant power grab by Boris and Cummings over the Treasury - and it comes barely a month ahead of the first post-election Budget. On first glance, I think this means purse strings are being loosened. Spending will be dictated by political needs and necessity, rather than the Treasury acting as a brake on political giveaways."

Neil Jones, Head of Institutional FX Sales at Mizuho Bank says he senses "the market is anticipating a more expansionary fiscal style chancellor waiting in the wings. With monetary policy potentially reaching the limits & possibly larger government spending ahead, Sterling would certainly benefit."

We are however also highly conscious that the Pound's advances against the Euro have much to do with the Euro's chronic underperformance in 2020.

The coronavirus outbreak is an act of poor timing for the Eurozone's industrial sector that had been looking to shake off the chains of the U.S.-China trade war and start growing again. 2020 was tipped by analysts as the year the Eurozone began to grow and outperform its peers again.

But, with the European supply chain so heavily reliant on China, the promise of a deterioration in Chinese growth thanks to the virus will only weigh on the Euro.

Indeed, we reported yesterday that expectations for an interest rate cut at the European Central Bank are rising again, and currencies tend to fall when their central bank brings out the knife to lending rates.

"The growth sensitive Euro has been hurt by the Chinese Coronavirus situation, the two territories being large trading partners, as well as some poor data from the Eurozone,” says Joe Tuckey, an analyst for Argentex Group PLC.

How high can Sterling go? We note that GBP/EUR does not tend to spend much time north of 1.19, typically gravitating lower for air on any forays this high.

While history does repeat, it would be premature to discount Sterling's chances of maintaining levels above 1.19 and even 1.20 this time around. However, Tuckey believes it will require a more sizeable fundamental recalibration on the Pound to sustain such levels and once again Brexit is important here.

“GBP/EUR has almost reached key technical chart resistance at around 1.20, and whilst we could expect this to be reached imminently, larger price moves would most likely originate from headlines emerging from the negotiations that start in earnest next month," says Tuckey.

Negotiations are tipped to begin in March, however it will only be later on in the year that truly market-moving headlines start emerging.

"Sterling has, of course, plenty of upside potential should negotiations show progression from this combative start, with the two sides quite far apart on issues such as standards on the environment, workers’ rights, future rules and so on," says Tuckey.