According to new forecasts from Rabobank, the Pound-to-Euro exchange rate reached one-year highs this week, which it’s likely to remain in the months ahead.
Sterling has proven more resilient against a recovering Dollar than its European counterpart and many other peers in recent weeks. This enabled the Pound-to-Euro as well as other Sterling exchange rates to rise, which culminated in GBP/EUR establishing a foothold above 1.17 this week.
The Pound-to-Euro exchange rate traded as high as 1.1771 on Thursday, its highest level since February 2020, following gains that reflected as much depreciation of the Euro as they do a repricing of the Pound and its prospects.
But with the Sterling entering the year close to historic lows against many currencies, including the Euro, only for the UK to then pull ahead of other major economies, including the European bloc in the vaccination rate, the Pound has recovered sharply this year.
“The GBP has been cautiously making headway vs. the EUR,” says Jane Foley, head of FX strategy at Rabobank.
“As recently as early February, the market dialogue contained a discussion about whether the BoE would have to adopt a negative Bank rate. A less dovish than expected tone from the MPC in early February combined with the impressive rate of vaccinations in the UK has instead seen a switch towards speculation regarding the timing of the first-rate hike.”
Europe’s single currency has been on the ropes in 2021. It has quickly come under pressure in January from the European Central Bank (ECB) concerns about the impact of exchange rate strength on its inflation target, only for Europe to fall noticeably and meaningfully behind the vaccination rate.
Procurement troubles have had Europe struggling to vaccinate even a fraction of the numbers seen each day in the U.S. and UK. Simultaneously, the bloc has also recently been overtaken by Canada in terms of daily injection numbers. Also, and while restrictions on activity are easing in the UK and parts of the U.S., many European countries have been engulfed by the third wave of infections that has seen governments returning many of the continent’s major economies to ‘lockdown.’
“Fears that the authorities in the region are failing to contain the third wave of infections are coinciding with reports regarding the slow vaccine rollout in the Eurozone. Together these are undermining expectations regarding the economic recovery,” Foley says. “We see scope for GBP to make a little more headway vs. the EUR later this year, but after this year’s strong start, the pound is likely to see further setbacks along the way.”
Vaccine troubles have set the European economic recovery back by months and cultivated a divergence of fortunes at the central bank level, which has given investors incentive to sell Euros in exchange for a range of other currencies, including the Pound.
The ECB’s March response to the ongoing sell-off in U.S. government bonds vindicated the market for having sold the Euro as a “funding currency” for wagers on more attractive assets this year, with the bank having “significantly” stepped up the pace of its government bond purchases to contain an increase in European yields, which came as a spillover from the U.S. sell-off but had tightened financial conditions in Europe.