GBP/EUR Rate Forecast: The Grind to 1.20 and Above is On, says Barclays

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Pound Sterling's rise against the Euro can extend into the coming months and reach a peak comfortably above €1.20, supported by a strong carry advantage and a waning Brexit premium.

This is according to a new foreign exchange research update conducted by Barclays, one of the UK's biggest lender and investment bank.

The research note reveals demand in the UK economy is recovering faster than that of the Eurozone, implying the potential for economic outperformance and lingering inflationary pressures that will keep the Bank of England in the slow lane when cutting interest rates.

"Demand resilience and still-considerable wage growth and domestic inflation stickiness imply lasting carry support for the pound," says Lefteris Farmakis, an analyst at Barclays.

Carry refers to when investors borrow capital in a low interest rate environment and buy assets where interest rates are higher, earning them a positive return. The flow of capital would bid the currency of the higher-yielding assets, in this instance, the Pound.

Carry is particularly attractive in a low-volatility environment, which defines the current market.

Meanwhile, Barclays say that risks facing the Euro "remain skewed to the downside".

"The eurozone's recovery in particular remains precarious. Indeed, it is notable that the pick up in sentiment indices in the UK has been stronger than in the eurozone to date, a reflection of it being driven by the common factor of higher real disposable incomes as inflation drops (and not factors that specifically benefit the eurozone).

Above: "Eurozone demand pick-up is lagging the UK" - Barclays. Track GBP and EUR with your own custom rate alerts. Set Up Here

UK politics have been a headwind for the Pound since the EU referendum of 2016, but Barclays says the wind is changing direction.

Barclays entered 2024 with a view that any premium carried by UK assets owing to Brexit has peaked and that the prospect of closer UK-EU ties lie ahead.

Specifically, Barclays sees a further unwind of any Brexit premium in the Pound following the UK's next general election, which can "add to its medium-term appeal".

Barclays forecasts "EURGBP grinding towards 0.82 by Q1-25".

This equates to a "grind" higher in the Pound to Euro exchange rate to approximately 1.22, suggesting that an eventual break of the mighty 0.85 barrier (1.1765 in GBP/EUR) will transpire.