GBP/EUR Exchange Rate Hits New 2021 High

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• GBP/EUR reference rates at publication:
• Spot: 1.1851
• Bank transfers (indicative guide): 1.1536-1.1620
• Money transfer specialist rates (indicative): 1.1744-1.1792
• Get a specialist rate here
• Set up an exchange rate alert, here

The Pound to Euro exchange rate reached a new 2021 high at 1.1870 on Friday, a level not seen since February 2020 when global markets began to fret about the spread of Covid-19.

Crucially the exchange rate held the gains to close out at 1.1855 which could suggest the major resistance points located around 1.18 have finally been broken: the exchange rate has struggled to close above 1.18 since 2020 and forays above this level have proven brief with a 'sell on strength' proving a lucrative short-term trading strategy.

Over the past six sessions tests above 1.18 have inevitable been sold into, with particularly strong selling interest coming during the U.S. trading session.

A decent amount of sell orders will have been burnt in the battle for 1.18 over recent days and the push to 1.1855 will have forced more orders out of the market which allowed the pair to close at a new 2021 high.

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Global markets are in a constructive mood creating the risk backdrop that tends to favour the Pound against the Euro and Dollar owing to its 'high beta' status.

Another focus for markets at present is the intention of the Bank of England to raise interest rates again by as early as December, or early 2022.

This tends to raise the cost of finance throughout the economy and increases the yield paid on UK financial assets, which in turn attracts foreign investor capital which in turn bids up the Pound.

"GBP has pushed higher," says Clyde Wardle, Senior EM FX Strategist at HSBC, "market pricing for a December rate hike rises. Based on market rates, the chances of a Bank of England December hike have risen to around 75% from below 50% just a week ago."

Economists at ABN AMRO have this week upgraded their Pound Sterling forecasts, acknowledging a rate hike at the Bank of England now looks imminent.

The Amsterdam based global lender and investment bank predicts the first rate hike from the Bank of England to fall on December 16, taking the Bank rate to 0.25% from 0.10%.

They expect another rate hike in the first half of 2022.

It is worth noting financial markets are pricing in a more aggressive path of rate hikes and expect a total of three 25 basis point increases before the end of September 2022.

"What does this mean for GBP/USD and EUR/GBP? We think that an early rate hike by the BoE gives some support to sterling," says Georgette Boele, Senior FX Strategist at ABN AMRO.

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Analysts at TD Securities meanwhile says one of their models shows Pound Sterling is the cheapest G10 currency at the moment over a 1-3 month outlook horizon.

The bank remains short EUR/GBP (i.e. holds a trade that delivers gains if the Euro falls in value against the Pound), "given the cross still holds a 1-sigma risk premium on a mix of positioning and valuation," says Mark McCormick, Global Head of FX Strategy at TD Securities.

"We also think the energy shock will likely aid in GBP's carry advantage, despite prospects for a growth downgrade," says McCormick. "Positioning is also short".

Nordic lender and investment bank Danske holds a bullish Pound to Euro exchange rate forecast on an expectation the Bank of England is to soon begin tightening monetary policy.

"We expect the UK recovery to continue although delta still creates uncertainty about the outlook," says Jens Nærvig Pedersen, Chief Analyst at Danske Bank. "We remain bullish on GBP".