GBP/EUR Rate Hits Fresh 2023 High

Above: GBPEUR at four-hour intervals showing fresh 2023 highs.

The Pound to Euro exchange rate rose a further quarter of a per cent to hit 1.1680 ahead of the weekend, its highest level since August 2022.

Gains come amidst an ongoing technical uptrend in Pound Sterling, a development Pound Sterling Live has covered in depth this week, here and here.

The rally in the Pound also comes ahead of a key couple of weeks that will see UK jobs and inflation data come ahead of the June 22 Bank of England interest rate decision.

Any downside surprises in the jobs and wage data (next Tuesday) and the inflation release (June 21) could see the Pound retreat and give back some of its data, suggesting the market is in something of a sweet spot for those selling their pounds.

"Central banks are under the microscope ahead of meetings next week in the U.S. and euro zone that will be followed by the UK on June 22. A spotlight on central banks tends to be bullish for the pound on the perception that the UK has more rate hikes on the table than its peers with Britain home to hotter inflation," says Joe Manimbo, Senior FX Analyst at Convera.

The European Central Bank (ECB) meanwhile meets on Thursday and another interest rate hike of 25 basis points is expected, with guidance to potentially signal further hikes.

The event poses two-way risks for the Euro, with an overtly bullish-sounding ECB likely to prompt a rally in the Eurozone's single currency.

"Key events next week obviously include the ECB and Fed meeting. Both will bring updated projections. The former is sure to raise rates further, to strongly hint at another move in July while keeping a data-dependent approach for moves further out," says Mathias Van der Jeugt, an analyst at KBC Markets.

Any Euro strength could pose a setback to the Pound-Euro rally, particularly if it follows a softer-than-expected UK wage and jobs report on Tuesday.

Thanim Islam, Head of FX Analysis at Equals Money, says the markets in June have been quiet with lower volatility in the FX space but upcoming domestic UK data events risk unsettling a becalmed market.

He says now would be a good time for those with FX payment requirements to take stock of recent gains for GBP to help decide on future buying of foreign currencies.

"For buyers of foreign currency, it's worth noting the potential headwinds the BoE could face to keep up with the markets rate hike expectations, and any signs that they can’t/won't could cause GBP to come off these highs."

Some analysts meanwhile suggest the Pound is nearing its limits, with the likelihood of a recession later in the year expected to weigh.

Claudio Wewel, FX Strategist at J. Safra Sarasin, the Swiss private bank says "while Pound Sterling is likely past peak pessimism, we do not think that sterling's recent recovery will extend. According to our projections, the UK economy will contract in 4Q23 and in the first half of 2024."

Wewel says renewed austerity drive should add to this, "hence we remain cautious on sterling".

J. Safra Sarasin's latest forecasts show the Pound will likely come under pressure near and medium term, but longer term a more sustained recovery is likely. "We expect a rebound in sterling once the global cycle re-accelerates," says Wewel.

EUR/GBP is forecast by J. Safra Sarasin to ease higher to 0.87 by the end of September, a level J. Safra Sarasin expects to be held through the remainder of the year and 2024.

This gives a GBP/EUR exchange rate forecast profile of 1.15, hinting that current levels will ultimately give way.