Pound Sterling-Euro Rate Hits Fresh Multi-Month Best

- GBP/EUR stronger in mid-week trade
- Technical resistance remains formidable at 1.1280
- But can still go higher in coming months says one analyst

Image © European Commission Audiovisual Services

• GBP/EUR spot at publication: 1.1292
• Bank transfer rates (indicative guide): 1.0990-1.1070
• FX transfer specialist rates (indicative guide): 1.1150-1.1213
• More information on specialist rates, here

Pound Sterling has strengthened in mid-week trade and hit a new multi-month best, thanks to an improvement in global investor sentiment that appears to be an important driver of the UK currency now that Brexit has faded as a major concern for the UK economy.

The Pound went higher against the Euro, Dollar and a host of other currencies on Wednesday in tandem with higher stock markets and equity prices, which in turn betray an improved sentiment amongst investors.

The Pound-to-Euro exchange rate has risen to 1.1292, which is its highest level since May 15 in a move that could represent a major about-turn in fortunes for the UK currency.

The GBP/EUR rally that we saw last week failed at a key technical resistance point during Friday and Monday's sessions, and the pair was in the process of pulling back from this level heading into Wednesday.

We wrote earlier in the day that the Pound looked liable to retrace its recent gains back to the mid-point of a multi-month range in the GBP/EUR exchange rate, located at 1.11. (Those regular readers of Pound Sterling Live will have been following our coverage of GBP/EUR's approach back up to the important 1.1280 level.)

This level - which translates into 0.8865 in EUR/GBP terms - was identified as a make-or-break point for the Sterling recovery: a break higher could lead to a rapid acceleration into new multi-month highs. But recent history shows that attempts to break above this level tends to fail:

Above: GBP/EUR's failures at 1.1280 risks another pullback to the middle of the range. But a decisive break above here opens the door to higher levels.

European and Asian stock markets have gone higher in mid-week trade while futures for U.S. markets are also suggesting a solid performance on Wall Street.

The general setup therefore suggests the UK currency is displaying a positive correlation to trends in investor sentiment, with today's gains against the Euro and Dollar correlating with a more confident stock market. Should markets continue higher, the Pound could well ride the coat tails of this sentiment and advance.

"The generalised pull higher in risk appetite has supported sterling," says Jeremy Thomson-Cook, Chief Economist at Equals Money. "Asian trade overnight has characterised the general feeling of contentment in markets at the moment; weaker USD, stronger equities, lower US bond yields."

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How far the Pound can ultimately extend higher ultimately depends on whether markets can learn to love it again.

Fundamental sentiment on Sterling is decidedly mixed, given the severity of the country's covid lockdown and struggles to get to grips with its new trading relationship with the EU. It was always going to require a more substantive shift in sentiment for the better in order for Sterling to break through tough resistance.

"Sterling is another currency which should do better the the euro in the weeks and months ahead, but I’m told a positive sterling view is a hard sell, given the dire outlook for the UK economy," says Kit Juckes, foreign exchange strategist at Société Générale.

However, Juckes says that if vaccinations in the UK can continue at the current pace and the Chancellor can resist premature fiscal tightening in the March budget, there’s every chance the Pound-Euro exchange rate will reach a target at 1.1628 by year-end.

"The risk of a double-dip UK recession has intensified following the third national lockdown and could force the BoE to ease again before long while the rates markets will continue to speculate about negative policy rates," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

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Crédit Agricole tell clients they have turned more cautious on the Pound, given lingering political risks in the form of a potential referendum on Scottish independence being triggered at some point in coming months.

Foreign exchange analysts at Germany's Commerzbank have meanwhile this week said to clients they have turned more pessimistic on the outlook for the British Pound.

In a research briefing out on Jan 15., analysts say the currency remains overvalued against the Euro and Brexit will continue to weigh on UK economic performance.

As such, 2021 is likely to see the currency depreciate in value against both the Dollar and Euro in their view.

"The outlook for the currency is unlikely to improve much in the coming quarters, which is why we have turned slightly more pessimistic on Sterling," says Thu Lan Nguyen, FX and EM Analyst at Commerzbank.