Pound-Euro Rate's 2021 Highs Still Possible: NatWest and Argentex

Modified: Thursday, 16 September 2021 08:56 BST
Written by: Gary Howes

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Pound Sterling is approximately 100 pips away from its 2021 highs against the Euro, a level that could be reached in the near-term say some analysts.

The calls come as the Pound-to-Euro exchange rate makes heavy work of its attempts to reclaim the 1.18 level with recent rallies tending to fizzle and then reverse.

But Paul Robson, Head of G10 FX Strategy at NatWest Markets, says recent domestic events have renewed his conviction that GBP/EUR tests recent cyclical highs, while

And Joe Tuckey, FX Analyst at Argentex, says "a test of 1.18 this week is probable".

Above: GBP/EUR has been trending in sideways since April

Both analysts suggest the fundamentals underpinning the Pound's outlook remain supportive.

"Interestingly, Sterling didn’t appear to react to the UK Government’s early and aggressive tightening of fiscal policy," says Robson, referring to the tax hikes announced by the UK government last week.

Economists warned that raising National Insurance Contributions and capital gains taxes could dent the UK's economic rebound, thereby creating headwinds to the Pound.

But, Sterling's sanguine response leaves NatWest Markets confident their 2021 recommendation to buy the Pound against the Euro remains a valid stance.

Robson adds that aspects of last week’s Bank of England testimony to Parliament's Treasury Select Committee "leaned hawkish".

Bank of England Governor Andrew Bailey said the minimum requirements to raise interest rates had been met by the economy and, crucially, three other members of the Monetary Policy Committee agreed.

"The relative importance of these two policy shifts, along with the outcome of the ECB meeting, renews our conviction that EUR/GBP tests the recent cyclical lows," says NatWest.

Above: EUR/GBP (top) and inverted to GBP/EUR (bottom).

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A regular daily currency briefing from Danske Bank says the Euro-Pound is "range trading for now" but they "still expect EUR/GBP to move lower here in the autumn".

The Bank of England is expected by markets to raise interest rates in 2022 which would be years ahead of any similar move from the European Central Bank (ECB).

"There remains much to be upbeat about for those closely following GBP/EUR while the BoE remain in the more hawkish camp," says Tuckey.

Last week the ECB revealed at their September policy meeting that the amount of assets they buy under their quantitative easing programme would be reduced in light of the recovering economy.

The Euro did appreciate following the confirmation a 'tapering' was underway, but gains were by no means substantive and did not stick as the ECB remains resolutely accommodative in its stance.

But for Tuckey the ECB policy meeting had a somewhat underwhelming feel given the tone of recent speeches.

The ECB's medium-term inflation forecasts proved to be a bugbear for Euro bulls as they showed inflation would be back below the 2.0% target in two years time.

"Inflation forecasts leaned relatively dovishly says Tuckey, adding that the ECB event represented a "dovish move" that has seen "ECB-driven excitement nosedive".

"With this in mind, a strong leg up to and maybe through 1.18 this week is probable," he says of the Pound-Euro's prospects.

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Argentex is of a view the upcoming German elections may spark some interest for currency markets although they expect Euro sentiment to likely languish until the next ECB meeting in mid-December.

It is then that a more strategic direction will be indicated by the central bank.

The Pound-to-Euro exchange rate has bounced back from last week's lows on the combination of central bank events but the rally has run out of steam at around 1.17.

Attempts to go higher tend to fizzle and then take a step back.

We note in an article out on Wednesday that soft global investor sentiment appears to be a prime suspect behind the blunted rebound.

The British Pound tends to struggle against the Euro when stock markets are selling off, as has been the case for the past ten days.

Economists cite slowing growth in China and the U.S. which is in turn said to be a result of the Delta variant of Covid-19.

The variant is sweeping the U.S. and slowing the economic rebound, and in China its increasingly regular appearances tend to be met by strict lockdowns that in turn slow economic activity.

The prospect of a rally to 2021 highs in Pound-Euro therefore could well rest with an improvement in global markets and means any prospect of 1.18 being reached this week are slim.

"2021’s playbook suggests that we have another 48 hours or so of volatility to contend with, and then, if history is any guide, the bulls will wrest back control," says Chris Beauchamp, Chief Market Analyst at IG.