Pound Sterling Hits New 2-Year Highs against the Euro

Image © Adobe Images

The British Pound has reached a new two-year high against the Euro as traders returned to their desks in London and proved keen to catch up on a bullish start to 2022 for global investors.

The Pound tends to benefit when market sentiment is supportive and a rally in global stocks has therefore allowed for further advances in the UK currency; "it is a typical risk-on currency that does well when equity markets are rallying and suffers when they fall," says strategist Thomas Flurry at UBS.

The Pound to Euro exchange rate rallied to 1.1962, levels last seen in February 2020, taking retail rates offered for international payments above the 1.19 threshold with industry-leading providers. The next key milestone is now the post-Brexit high of 1.2074, also reached in February 2020.

The failure of the market here in 2020 - and the looming round number of 1.20 - could however prove to be a near-term limit for the recent rally as a significant number of market orders to buy euros are expected to be triggered.

Above: GBP/EUR at weekly intervals, showing a return to the top of a post-Brexit range.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

Investors bid stocks, commodities and the Pound amidst a sense that the worst of the Omicron wave in western economies is close and further containment measures will largely be avoided.

This could allow for a period of economic expansion in the first half of 2022 as consumer and business confidence rebuilds following the Omicron surge.

The first half of the year will also see investor sentiment aided by ongoing support from global central banks.

Although investors anticipate 2022 to be the year that central banks start reducing support in a material way, the U.S. Federal Reserve and European Central Bank will still continue to deliver expansionary monetary policy until at least mid-year.

Such an outcome would create a supportive backdrop for Sterling.

"With yet more indications that Omicron, though highly infectious, does not cause such serious illness, a wave of relief is pushing up companies which have been hit by worries about tighter restrictions," says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

The S&P 500 rallied on January 03 to reach a new all-time high, meanwhile Asian and European markets also pushed towards recent peaks.

According to Ebrahim Rahbari, Chief G10 Currency Strategist at Citi, the path for stocks - and by extension currencies - in 2022 won't be smooth, but the strong start to the year can persist for some weeks.

"Given the massive inflows into risk assets in recent years and notably in 2021, and the major inflection point for central banks, there are clearly risks of larger corrections and we think those will be increasingly relevant as central banks tighten the screws," says Rahbari.

"But in the near-term, positioning and the moderate pace of tightening, while levels of monetary accommodation remain high, suggest that risk assets including equities could continue to prove resilient. Hence for now, we expect to see a few more record-highs for the S&P," he adds.

{wbamp-hide start}

{wbamp-hide end}{wbamp-show start}{wbamp-show end}

Domestically, the Pound would have found support from observations the UK is unlikely to impose fresh restrictions on movement and activity, despite rising Covid-19 cases.

Prime Minister Boris Johnson said on Monday the Omicron wave is proving to be "plainly milder", even as further pressures on hospitals were to be expected.

Data from London, where the Omicron outbreak started, is meanwhile tentatively showing hospitalisations have reached their peak and are starting to plateau.

Should the Omicron wave peak and start falling in January then a stronger recovery in UK economic activity would be anticipated in February.

"Omicron appears to be dealing a substantial blow to economic activity at the turn of the year, but the good news is that GDP should be rising again in February," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Should consumer and business confidence recover accordingly the Bank of England could feel emboldened to raise interest rates again in February.

The prospect of higher interest rates in the UK relative to elsewhere would in turn prove supportive of the Pound as foreign capital flows into the UK to take advantage of the superior yields on offer.

HSBC says in a note out at the start of the year they now expect three more hikes of 25bps each: in February, May and August 2022, taking Bank Rate to 1.00%

"We expect the BoE now to move faster than in our previous forecasts – and go further," says HSBC.