GBP/EUR Rate Slides as 2023's Star Performer Starts to Fade
- Written by: Gary Howes
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Pound Sterling has been a distinct underperformer over the past 48 hours as 2023's top-performing G10 currency loses some of its shine.
There are no fundamental triggers to the recent downside action in the UK currency which will only see meaningful domestic data released next week.
Instead, it appears some of the outperformance witnessed in March is reversing.
Losses against the majority of G10 peers come amidst a widespread rally in stock markets, which is surprising as positive investor sentiment has long been associated with GBP upside.
"The pound benefitted at the start of the year because of its high-beta status: resilient global demand meant a strong risk-on bid," says Skylar Montgomery Koning, Senior Global Macro Strategist at TS Lombard.
To be sure, the Pound remains in the ascendency against the Dollar - which continues to respect its inverse relationship with sentiment - allowing GBP/USD to reach new ten-month highs over recent hours.
But why has the Pound come under pressure elsewhere over the past 48 hours?
Pound Sterling was also one of FX's best performers during the market selloff that resulted from bank failures in the U.S. and Europe in March, a performance that surprised analysts.
"The outperformance is remarkable. We did not envisage the pound being the 2023 outperformer. In the past month, the drivers have shifted, with the pound benefitting because of its limited exposure to the banking crisis," says Koning.
"The crisis was rightly not seen as a large drag on UK growth and the massive dovish repricing that occurred in the US and Europe did not occur to the same extent in the UK," she explains.
The Pound's pullback against the likes of the Euro and commodity dollars, therefore, suggests some payback for March's strong performance.
GBP/EUR continues to trade within a frustratingly tight range as both the UK and EU economies have continued to surpass expectations in 2023, making it difficult for either currency to gain an advantage.
GBP/EUR has gained in every month of 2023 but the advances have been limited to less than half a per cent, which is exceptional for a major currency pair.
Both the Bank of England and the European Central Bank are expected to hike rates again in May, denying both sides of the equation a distinct advantage.
Despite the rangebound nature of the currency pairing, there is confidence that downside prospects are limited, which offers good protection for those looking to buy euros.
Looking ahead, analysts suggest that 1.1450 is likely to be a maximum for GBP/EUR which should struggle to hold onto any forays above 1.14, which would limit euro-buying prospects.
The next point of interest for GBP/EUR will be on Tuesday, April 18, with the release of UK jobs and wage data, followed by inflation data the next day.
If there are upside surprises in these data releases, it could spur a test of 1.14-1.1450 again. However, if the data is weaker than expected, it could lead to GBP/EUR weakness starting to build.
In terms of the downside, the March low at 1.1280 would come into view if GBP/EUR weakens further.
GBP/EUR Forecasts Q2 2023Period: Q2 2023 Onwards |