Pound Sterling Forecast Targets against the Euro and Dollar: How Far can the Rally Go?

- Where next for GBP?
- Analysts give potential near-term targets
- Calls come as GBP hits fresh highs

Above: Prime Minister Boris Johnson holds a Covid-19 Press Conference with Chief Scientific Adviser, Sir Patrick Vallance, in 10 Downing Street. Picture by Simon Dawson / No 10 Downing Street.

• Market rates at publication: GBP/EUR: 1.1476 | GBP/USD: 1.3928
• Bank transfer rates: 1.1255 | 1.3638
• Specialist transfer rates: 1.1396 | 1.3830
• More about bank-beating exchange rates, here

The British Pound is expected to build on its recent gains over coming days thanks to positive technical momentum and improved fundamental underpinnings that include the country's rapid vaccine rollout and expectations for a sharp pick up in economic growth.

The Pound advanced a third of a percent against the U.S. Dollar at the start of the new week to quote above 1.39 for the first time in two years, while the UK unit advanced a quarter of a percent against the Euro to quote at 1.1467.

Gains extend into Tuesday with GBP/USD up at 1.3928 and GBP/EUR at 1.176. The additional gains mean the Pound is the second-best performing major currency of 2021 with only the oil-fuelled Norwegian Krone outperforming.

"The British Pound continues to trend higher against many currency peers as the UK looks set to ease virus-led restrictions on completion of vaccination targets. GBP/USD looks poised to test the $1.40 threshold this week, whilst GBP/EUR could stretch beyond €1.15," says George Vessey, UK Currency Strategist at Western Union Business Solutions.

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Owing to the impressive gains registered during the past month, Sterling has now easily outstripped the average forecast targets set by the world's leading institutional analysts.

The performance is therefore seen by some wrong-footed analysts as being a case of 'too much, too soon', with many retaining sceptical slant on the currency owing to an enduring focus on the negatives associated with Brexit.

"The successful vaccination campaign in the UK is fuelling hopes for a quick recovery and boosting the pound. In the short term, the appreciation trend could continue, but as soon as the effects of the Brexit become more apparent, the trend is likely to turn again," says Thu Lan Nguyen, FX and EM Analyst at Commerzbank.

Nevertheless, tactical and technical analysts maintain a view that the trend can extend near-term and that standing in its way would prove futile.

Traders at JP Morgan's currency desk in London say the next big upside level for the GBP/USD exchange rate is 1.4000, while for the GBP/EUR exchange rate it is 1.1441 and then 1.1534 that are eyed as upside targets on a tactical basis.

"Still feel pretty good about sterling at this juncture as we open today testing the1.3885/95 level, with vaccination data continuing to impress as the UK hits the 15 million milestone over the weekend," says a note from the JP Morgan dealing desk to clients.

Should Pound Sterling encounter weakness, initial support for GBP/USD is at 1.3800/10 and then 1.3750/60 says JP Morgan.

Support for GBP/EUR is meanwhile eyed at 1.1370 ahead of 1.1274.

"GBP/USD trending in a consistent ascending channel here. Due a pullback before long, but just like last weeks move lower, it provides another potential opportunity to ride the wave. Need to break below 1.3773 to negate short-term bullish outlook," says Joshua Mahony, Senior Market Analyst at IG.

"Unless something gloomy comes along, sentiment has turned wildly risk-on, as we see from equity in dices and maybe the sterling rally, too. What’s behind it are rising vaccinations, the prospect of the Biden recovery spending, and, dare we say it, Draghi in office in Italy and Trump out of office in the US. The reflation trade is here and dancing in the streets," says Barbara Rockefeller, Chief Economist at Rockefeller Treasury Services.

Rockefeller is an international economist and financial forecaster specialising in foreign exchange and is considered to be a pioneer in technical analysis. She is noted as also combining technical analysis with fundamental analysis

"We should expect the risk-on mood to do some damage to the dollar," she adds.

A fundamental underpinning in Sterling has been provided by the country's vaccine rollout that now has seen the most vulnerable 15 million citizens receive a first vaccination and pressure is building on Prime Minister Boris Johnson to lay out his plan for unlocking the economy, which he is expected to do on Monday February 22.

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"We think the market will increasingly focus on progress on the vaccination front, as investors look for certainty about when risks of lockdowns will ease and the recovery can fully take place," says Juan Prada, an economist at Barclays.

Johnson said on Monday that he expects the next phase of the unlocking of restrictions to be irreversible.

Researchers at Barclays have assessed vaccination data and scored how each country ranks across different metrics: i) the total doses administered per capita; ii) supply arrangements and vaccine procurement adjusted by population.

"Among developed economies, the UK leads on doses administered and supplies procured," says Prada.

The number of coronavirus patients in hospitals in England will more than halve over the next month thanks to the vaccination programme, according to internal government projections seen by The Times.

According to a report in the newspaper, hospital admissions and deaths are predicted to fall to October levels, according to estimates presented to the Prime Minister by its scientific advisers.

The report showed infection rates were falling faster than anticipated and that advisers were increasingly optimistic about the reopening of schools on March 8 and the relaxation of other restrictions in April.

"Sterling continues to reap the dividends of a successful vaccine rollout and momentum is building towards a reopening of the economy – probably starting with schools on 8 March. This should be supportive of the post Brexit re-rating of UK asset markets (very observable in the UK Gilt market on Friday) and keeping GBP supported," says Prada.

Despite the positive fundamental developments, Barclays are looking for Sterling to consolidate over coming days, suggesting the rally will likely fade at some point.

"We expect GBP to consolidate this week at current high levels. Vaccine rollouts continue at good pace, while this week’s data should not offer significant change in macroeconomic environment relative to January. The risks to GBP seem to be skewed to the downside, as market too easily priced out the possibility of negative rates in future, in our view," says Prada.