Pound-to-Euro Could be on Course for 1.20: Western Union Strategist

- GBP/EUR could continue to 1.20
- But climb could take weeks
- But beware overbought conditions
- Consolidation could be due

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The British Pound hit 11-month highs against the Euro over the duration of the previous 24 hours amidst a renewed pulse of buying and one analyst says 1.20 is now in the frame, but there is also a flashing warning sign indicating the Pound is now overbought.

The Pound is now up 3.30% against the Euro in 2021, with half of those gains being recorded in the past week alone.

"The slower pace of the vaccine rollout in European countries has been weighing on the common currency lately. The speedy rollout in the UK, coupled with fading negative interest rate bets, has supported the pound. GBP/EUR opened above €1.15 today for the first time since March 2020," says George Vessey, a currency strategist at Western Union Business Solutions.

The chart below shows the Pound-to-Euro exchange rate leapt above a clutter of resistance located in the 1.1515 area to trigger a new 11-month best at 1.1571.

To get a gauge of what the latest moves mean for international payments, banks would be offering tranfer rates in the 1.1150-1.1230 region when the spot market is at 1.1550 as is the case at the time of publication, while independent providers would be expected to be offering a rate at exactly 1.1500.

The gains mean the Pound is back to where it was in March 2020, a time when covid panic was starting to grip global financial markets sending stocks, commodities and currencies such as the Pound into a tailspin.

The sheer scale of the declines means there is a cliff of some 500 pips between the 11-month high and the 12-month high.

Nevertheless, Vessey says there is a chance the Pound can yet scale this mountain and achieve one-year highs against the Euro, even if some patience is required.

"The last time the currency pair broke above and opened above the €1.15 mark whilst climbing higher was in October 2019 and after a 3-week consolidation period, GBP/EUR went on to reach €1.20 after a 5-week ascent," says Vessey.

The British Pound jumped against most of its peers on Thursday, February 18 as the currency's stellar 2021 maintained a high gear.

Gains came against all major G10 currencies, confirming a decidedly Sterling-based flavour to the moves:

Above: GBP climbed against all its peers on Thursday, Feb. 18

"There were no fresh headlines to drive GBP enthusiasm ... so presumably the themes of successful vaccine roll-out, no material dislocation from Brexit so far, and a stronger than expected Q4 20 GDP print continue to buoy spirits," says Daragh Maher, Head of Research, Americas at HSBC Securities.

Indeed, a confluence of up to six or so positive drivers appear to be powering the advance:

1. Positive technical momentum
2. An ongoing post-Brexit realignment
3. UK's lead in the vaccine race
4. Negative interest rates at the Bank of England now unlikely
5. Broadly supportive global equity markets trends
6. Potential buying of Sterling by global central banks

How long these positive drivers remain in place will determine how far the Pound can rally.

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"The stage might be set for another run higher but will depend on whether the vaccination rollout differential widens and the UK economy reopens faster than its European peers. All eyes will therefore be on the upcoming UK government’s recovery plan next week and the Chancellor’s landmark Budget on March 3," adds Vessey.

There are however reasons to be cautious on expecting further advances in the near-term given the rally is now overbought, from a technical perspective.

The Relative Strength Index (RSI) on the daily chart has hit 75.37 - any reading above 70 is considered to show that an asset is overbought:

The RSI in the lower pane in the above chart shows that when the RSI veers into oversold (below 30) or overbought (above 70) an about-turn in trend can take place. Often a period of consolidations ensues that allows the overextended signal to settle.

Analyst Peter Stoneham at Reuters says "an acceleration can be seen before a turn," something he believes Sterling buyers riding the rally "will not want to hear".

David Alexander Meier, an economist at Swiss bank Julius Baer says the Pound appears to be overshooting and that it will eventually succumb to lower levels as lingering negative fundamental issues start to bite.

"The Bank of England will now hardly jump on the negative rates train, so the data supports an overshooting pound until Brexit realities sink in," says Meier in a recent briefing note.

Julius Baer tell clients they are to stick to their "rather pessimistic GBP outlook".