GBP/EUR Rate's Peak Seen Above 1.17 By Rabobank

• GBP is 2nd-best performer of past 5 days
• EUR weighed by German inflation undershoot
• ECB tipped to cut rates ahead of BoE
• GBPEUR can peak above 1.17 says Rabobank

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The British Pound can extend its recent recovery against the Euro, according to a senior strategist at one of Europe's largest banks.

Rabobank expects the Pound to Euro exchange rate to move higher over the coming six months on the expectation that the Bank of England will hold interest rates unchanged for a longer period than the European Central Bank during 2024.

"Over the past five days, the pound is the second best performing G10 currency," says Jane Foley, Senior FX Strategist at Rabobank in London. "On the back of this persistently hawkish message from the BoE, EUR/GBP has pushed back below the 0.87 level."

The Pound to Euro exchange rate reached its highest level in over a month on Wednesday at 1.1569, tracking a rise in UK bond yields relative to Germany's.

Rising UK yields reflect deflating market expectations for the timing of the first cut and the overall amount of cuts that 2024 will see at the Bank of England.

The Pound's gains against the Euro were aided by softer-than-expected German inflation numbers, suggesting Thursday's Eurozone inflation figure will confirm prices are falling back to the ECB's 2.0% target.

German November CPI inflation read at 3.2% year-on-year, with the Eurozone harmonised number easing to 2.3% y/y.

"While ECB President Lagarde has retained a hawkish tone in her outlook, the market sees risk of an ECB rate cut as soon as the spring," says Foley.

"On the assumption that the market maintains the expectation that BoE rate cuts will lag those of the ECB, we expect GBP to find a little additional support in the coming months. We continue to favour selling rallies in EUR/GBP," she adds.

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Bank of England policymakers have meanwhile lined up over the past two weeks to warn financial markets that expectations for a series of rate cuts in 2024 were premature as inflation was far from being defeated.

Governor Andrew Bailey has led the charge, warning that the journey from 4% inflation to 2% would prove far harder than the drop from 6% to 4%.

Chief Economist Huw Pill has warned rates would stay higher for longer, as has Dave Ramsden and Jonathan Haskell. Haskell told an audience at the University of Warrick on Tuesday that the still-high degree of labour market tightness continues to impart inflationary pressures on the economy.

"This will need higher rates for longer to get inflation sustainably to target. This is why I have been voting for higher rates at recent meetings," he said.

Given a likelihood the ECB cuts before the Bank of England, Rabobank forecasts EUR/GBP at around 0.86 on a 1-to-3-month view and 0.85 on a 6-month view.

This gives a GBP/EUR forecast of 1.1630 and 1.1765, respectively.