Pound-Euro Exchange Rate Forecast for Move Above 1.20 by Nomura

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Foreign exchange strategists at investment bank Nomura are looking to sell the Euro and buy Pound Sterling in anticipation of outperformance by the UK currency.

"We expect GBP to outperform," says Jordan Rochester, a foreign exchange strategist with Nomura. "We shift into short EUR/GBP in cash".

'Shorting' EUR/GBP is trader-speak for selling the Euro while buying the Pound.

The call comes as the Pound rises to its highest level against the Euro since early April with the Pound-to-Euro exchange rate rising to 1.17 on Thursday, a move identified to have strong links with a selloff in the Euro-Dollar exchange rate.

The Euro-Dollar exchange rate fell back below the psychologically significant 1.20 area in the aftermath of the mid-week U.S. Federal Reserve meeting which saw the Fed suggest interest rates might rise in 2023.

Previously the market had expected the first rate rise to only come in 2024.

The market sold stocks and bought the Dollar in reaction.

"The Fed meeting was not the outcome we expected. Higher dots for 2023, downplaying labour market weakness and doubting the transitory inflation view equals faster liftoff of rates," says Rochester.

The Euro was meanwhile left exposed as the Fed now effectively joins the Bank of England in beating the European Central Bank in the race to normalise monetary policy, a situation reflected in declining EUR/USD and EUR/GBP exchange rates:

Above: The EUR/USD (top pane) dragged EUR/GBP (bottom pane) lower in the wake of the Fed policy decision.

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However Nomura aren't looking for the Bank of England to be a near-term source of support for the Pound, judging that next week's policy decision will unlikely hold any major changes in policy.

Instead any consequential shifts in stance from Threadneedle Street are more likely to come in August when the Bank's next Monetary Policy Report is held.

But Rochester is of the view the UK economy's post-Covid rebound will continue to offer support for the currency.

"The UK's mobility is rising despite Delta variant concerns, this should start to be reflected in data surprises. The UK is more exposed to the reopening equity sectors, and ETF inflows have been a boost," says Rochester.

Nomura are looking for the Euro-to-Pound exchange rate to fall to 0.83, which equates to a rise in the Pound-to-Euro exchange rate to 1.2048.

The main risk to this trade is that the pandemic in the UK, currently fuelled by the Delta variant, throws the UK's exit from Covid restrictions off course and negatively impacts consumer and business confidence.

"Delta variant cases are clearly rising at a rate which could see the government delay full reopening beyond19 July. But this was expected when the roadmap was initially created in February," says Rochester.

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