Pound Sterling Dips, but Barclays Look to Buy it against the Euro

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"Potential positive GBP seasonality in April may help EUR/GBP to break 0.85 resistance level" - Barclays.

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The British Pound kicked off its week by flying to fresh 13-month highs against the Euro and reaching 1.39 against the U.S. Dollar, but the UK currency hit the buffers and suffered an abrupt reversal in fortunes on Tuesday that saw it drop by nearly a percent against its two key peers as UK traders returned to their desks from a long Easter weekend.

The declines in the Pound come amidst a dearth of economic data in the UK this week and the currency market commentators we follow have failed to identify a clear driver for the declines, suggesting the underperformance must become more entrenched before a driver becomes apparent.

The Pound-to-Euro exchange rate fell to as low as 1.1632 while the Pound-to-Dollar exchange rate fell to a low of 1.3812.

2021 has nevertheless seen the Pound advance against the majority of the world's major currencies and the trend means most technical analysts continue to favour further gains by Sterling, with dips against the majority of G10 currencies still regarded as a tactical buying opportunity.

Above: GBP fell against all its G10 peers on Tuesday April 06.

In this vein, this week sees strategists at Barclays - the UK high street lender and investment bank - tell clients they are betting on a further rally in the Pound against the Euro and they tell clients they have anointed selling EUR/GBP as their "trade of the week" as a result.

"Recent UK economic data printed above expectations and the economic outlook continues to improve amid gradual loosening of pandemic-related restrictions. Risks associated with the economy reopening should be mitigated by good vaccination efforts," says analyst Marek Raczko, a foreign exchange strategist at Barclays.

Expectations for improved UK economic performance contrasts markedly with the Eurozone where most countries are tightening restrictions, given a spike in covid-19 cases.

"EUR will likely remain under pressure, as the EU still struggles with the latest wave of pandemics," says Raczko.

The IMF on Tuesday released their latest economic forecasts that show they now expect the UK economy to grow faster than that of the U.S. and Eurozone in 2022, with growth of 5.3% forecast in 2021 and 5.1% forecast next year.

The IMF said UK growth would be 0.8 percentage points greater this year as it declared that a path out of the economic crisis was "increasingly visible".

The IMF also upgraded forecasts for the U.S. economy by 0.8 percentage points in 2021 to 5.1% and 0.5% in 2022 to 3.6%. But projections showed the eurozone would continue to lag behind with an upgrade of 0.2% in both 2021 and 2022, taking forecast growth to 4.4% and 3.8% respectively.

France last week entered another major lockdown while Italy extended an existing lockdown, it meanwhile appears the prospect of similar measures in Germany have increased.

German tabloid Bild reports Chancellor Angela Merkel’s government has grown dissatisfied with regional approaches to the extent it wants a large nationwide lockdown to curb rising infection rates.

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Measures on the table include nationwide stay at home orders imposed either at night or for a 24-hour period. It would be the first time such a measure has been put in place in Germany.

Another headwind to the Euro cited by Barclays is the failure of the EU to pass its covid recovery fund, which would unlock billions of euros to help boost the region's economy.

Last week saw the German Constitutional Court (GCC) suspended the ratification of Own Resources Decision (ORD), the legal act allowing the European Commission to borrow the money from investors in order to create the rescue fund.

Barclays say the German court's ruling won't derail the fund, but adds yet another delay in the process.

Seasonality is meanwhile cited as another reason to bet on the Pound, with Barclays joining other analysts in noting that April tends to be an historically strong month for the UK currency.

"Potential positive GBP seasonality in April may help EUR/GBP to break 0.85 resistance level," says Raczko. (EUR/GBP at 0.85 gives a Pound-to-Euro exchange rate of 1.1765).

Analysis by the investment bank shows the seasonal effect on Sterling tends to be strongest during the last ten days of April. In addition, they find that that while seasonal appreciation by the Pound against the Dollar has faded significantly, it should remain significant against the Euro.

"We expect that improving economic conditions, amid loosening of COVID-19 restrictions, and April seasonal factors, driven by tax and dividend-related repatriations, should support sterling in the near term," says Raczko.

Barclays meanwhile do not expect a surge in hospitalisation rates in the UK, given that almost 60% of adults had their first vaccination dose.

"This should drive a wedge between sterling and EUR as the pandemic situation remains difficult," says Raczko.

Barclays are looking to sell Euro-Pound with a target set at 0.838. This gives a buy on Pound-Euro with a target set at 1.1933.