Pound Euro Exchange Rate to be Boosted by Euro-zone Woes, Brexit Trade Fears Will Act As a Ceiling
Confidence in a UK economic recovery and further Euro-zone vulnerability will continue to provide near-term British Pound to Euro (GBP/EUR) exchange rate support with scope for further near-term gains, especially with the Pound still undervalued.
There, are, however, important concerns over EU trade friction which will cap pound gains amid medium-term concerns over the growth potential.
Bank of America notes UK fundamental concerns. “We see more GBP upside near term given the fast UK vaccination rate, but we are long-term bearish because Brexit reduces the UK’s growth potential.”
There is scope for forecasts to catch-up with spot gains but, at this stage, the consensus is for GBP/EUR to weaken slightly over the next 12 months.
GBP/EUR has made strong gains this year with initial relief that a goods trade deal was reached. Gains accelerated as the strong UK vaccine programme stood in strong contrast to major setbacks in the Euro-zone programme.
GBPEUR has strengthened to 12-month highs around 1.1750.
Pound Sterling sentiment remains firm with further support from optimism over the UK vaccine programme, especially in contrast with the Euro-zone performance.
The latest UK data has recorded that 30.7mn people have received a first vaccine dose and 3.8mn have also received a second dose.
Nordea commented; “Going forward, we assume that the GBP optimism continues due to a successful vaccine roll-out in the UK.”
The UK has started to re-open the economy with expectations that GDP will recover strongly from the second quarter.
EU Performance Continues To Lag
In contrast, the Euro-zone vaccine programme is lagging with a rate below 16%.
The slow progress and logistical issues has undermined confidence in the outlook and hurt the Euro-zone recovery profile.
In particular, there have been concerns over the AstraZeneca vaccine, especially with regulatory issues.
Earlier in March, there were suspensions of the vaccine due to concerns over blood clotting concerns.
The European regulator declared that the vaccine is safe, but there have been fresh concerns this week with Germany, for example, blocking its use for those under 60.
Westpac commented; “The EU continues to struggle with both the current spread of COVID-19 and the vaccine rollout. An increase in new cases in Q1 has prompted renewed activity restrictions in e.g. Germany, France and Italy.”
Vaccine Wars Avoided For Now
The EU has agreed additional powers surrounding the vaccine programme which can allow countries to block exports to other countries.
There were concerns that shipments to the UK would be blocked which would have had a serious impact on the UK programme.
The worst case scenario has been avoided with an agreement to boost overall vaccination optimism which provided some relief for the Pound.
ING commented; “With the UK keeping a good pace, markets continue to see the UK Government’s timeline to re-open the economy as realistic and therefore sterling is retaining some better resilience than other G10 currencies to USD appreciation.”
There will, however, be a significant UK slowdown during April with expectations of a sharp slowdown in the number of people receiving first does as the programme has to concentrate on giving second doses.
If the EU manages to speed-up the process, there will be scope for Euro confidence to recover.
Citibank commented; “We believe that EUR remains vulnerable to lockdown and vaccine risks for the foreseeable future.”
Credit Suisse added; “Unfortunately for the EU, the impression of petty negativity towards the UK only causes further loss of confidence in its ruling political class that many feel should really be focused instead on getting its own vaccination game right. This only adds to reasons to mark down EU animal spirits and by extension EUR prospects.”
The bank has raised its medium-term Pound to Euro (GBP/EUR) forecast to 1.1900.
There is, however, the risk that confidence in the overall European economy as a whole will weaken which would also limit potential support for the Pound.
Euro (EUR) Exchange Rates to be Weighed by ECB’s Dovish Stance
The ECB remains committed to a very expansionary monetary policy to help raise the inflation rate and maintain loose financial conditions.
The Bank of England (BoE) remains optimistic over the economic recovery outlook. Chief Economist Haldane is notably bullish with expectations of a surge in consumer spending as excess savings built up during lockdown are spent.
Following the February policy meeting, markets moved to price out the potential for negative rates which triggered an important re-rating of the Pound.
Rabobank commented; “The BoE has been less dovish than most of its peers with respect to the outlook. While Governor Bailey has retained a note of cautious in his comments, Chief Economist Haldane has been unfettered in his enthusiasm, referring to the UK economy as a coiled spring.”
Danske Bank added; “Eventually, the BoE is likely to tighten monetary policy earlier than the ECB.
Brexit Trade Friction Undermines Confidence
The coronavirus pandemic has tended to lessen the focus on Brexit and underlying trade tensions, but there are still important reservations over the outlook following the slide in trade volumes for January.
Further weakness in exports would feed through into the narrative of UK fundamental vulnerability.
Nordea noted friction over trade in goods and important concerns over services, especially in financial services with no deal in place and the EU attempting to increase market share; “At some 7% of the UK economic output, the financial services sector is not insignificant. Both parties are impacted negatively by Brexit, however, it does appear that the UK has the short end of the stick.”
Pound to Euro (GBP/EUR) Exchange Rate Forecast: 1.2 in 2021
Nevertheless, Nordea expects GBP/EUR to strengthen to 1.1900-1.2050 amid vaccine optimism.
Credit Agricole commented; “Given that the GBP’s recent rally relied heavily on the success of the UK vaccine rollout so far this year, any evidence that the rollout will be slowing could fuel concerns about delays of the government’s plans to reopen the economy and thus continue to hurt the currency.”
Danske Bank took a more optimistic stance; “We are still of the view that Brexit uncertainties have declined significantly, which should support business investments in the UK this year and next.”
RBC remains notably bearish on the medium-term Pound outlook due to weak fundamentals.
“Our longer-term expectations for GBP have to include the risk that attracting the foreign inflows the UK will need “requires” a relative cheapening of UK assets via the currency. We therefore expect grinding GBP underperformance to resume.”
Table comparing bank currency predictions 02/04/2021