The Pound-to-Euro exchange rate reached a new two-year high last week. It will likely establish a more durable foothold above 1.17 over the coming days as a divergence between the UK and Eurozone economies remain top of mind among investors.
UK Pound Ends Higher Against Counterparts
Sterling ended the week higher against all major counterparts except the U.S. Dollar and Norwegian Krone with the Pound-to-Euro rate having traded as high as 1.1719 in the closing stages of the period as diverging prospects of the UK and Eurozone economies became more evident.
With new or prolonged ‘lockdown’ announced for major European economies last week just as the UK prepares to begin reopening, the widening gap between short-term prospects of UK and European economies has become all but impossible to overlook for investors.
Some 29 million adults had received the first shot of a coronavirus vaccine on Friday, which is almost half the entire population and includes all adults who’re categorized as most vulnerable to the coronavirus, keeping the country on track to have offered all adults a vaccine by July.
Meanwhile, the controversial topic of vaccine export restrictions featured heavily on the agenda of Thursday and Friday’s European Council meeting as the bloc scrambles to ramp up its own lackluster program, which has set the Eurozone recovery back by months compared with the UK, U.S. and others.
“Concerns about a worsening virus situation and the slower vaccination progresses in the eurozone may widen the UK-EU gap in terms of recovery expectations, and we could see EUR/GBP test the key 0.8500 support in the coming days,” says Petr Krpata, chief EMEA strategist for currencies and bonds at ING. “Much focus will remain on the virus situation in Europe and whether lockdowns can slow rising case numbers and also whether the slow pace of vaccinations can finally reach exit speed.”
Sterling would rise to 1.1764 if ING’s Krpata is right about EUR/GBP slipping to 0.85 this week as investors respond to contrasting economic outlooks.
“In contrast to other major European countries, the number of new weekly COVID cases has continued to fall since mid-February (86k to 39k) albeit at a slower pace in more recent weeks. Perhaps more importantly, the number of patients in hospital has continued to fall markedly,” says Lee Hardman, a currency analyst at MUFG. “The improving outlook for the UK economy should continue to encourage a stronger GBP in the coming months. April also tends to be a strong month for GBP.”
Contrast in economic outlooks has had meaningful consequences already with the European Central Bank (ECB) having brought forward pre-planned purchases of government bonds under its quantitative easing programme to prevent Eurozone yields rising in line with global counterparts. This is just as the Bank of England, Federal Reserve and others signal indifference to the increasing returns offered by UK and U.S. bonds, which reflect investors’ optimism about the outlook for interest rates.
“The GBP’s rebound should be enhanced by the efficacy of the UK government’s vaccine roll-out program which will boost expectations of a relatively earlier economic normalization in the UK. We continue to feel that the cross can reach 0.83,” says Shaun Osborne, chief FX strategist at Scotiabank, tipping a level of EUR/GBP that is equivalent to a Pound-to-Euro rate of 1.20.