Pound / Euro rate set to hit 1.19, helped by rally against US dollar

  • GBP / EUR breaks back above 1.18 and could test 1.19
  • GBP / USD tries to rally above 1.3400
  • Omicron virus is a mild strain after studies
  • Market bets on BoE discount rate hike in 2022
  • Cushioned European gas prices add support

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The pound remained close to December highs against the euro and the dollar ahead of the festive break, but could drop back to 1.19 against the single European currency, according to Scotiabank strategists, who also flagged risks on the rise for the GBP / USD.

The pound remained one of the top performing major currencies for the week on Friday and was previously listed at 1.1883 against the euro on Thursday when world markets were lifted by other studies suggesting the latest strain of coronavirus is a lesser threat to public health than others.

Studies in England, Scotland and South Africa recently found that the risk of hospitalization was between 15% and 80% lower with the new strain Omicron than with the delta variant, according to a summary from the British Medical Journal. relevant research.

Wednesday night’s revelation led to an apparent easing of market concerns about the UK’s economic outlook, with prices in the overnight index swap market indicating that investors subsequently raised their expectations for rates. interest from the Bank of England (BoE) next year.

“As we expected, the evolution of the yields is pulling the EURGBP towards the level of 0.84 [GBP/EUR toward 1.1904] and at 0.8439 at the time of writing, the pair is trading at its lowest level since late November, ”said Juan Manuel Herrera, strategist at Scotiabank.

“As the BoE’s tightening cycle will act as a key driver for the strength of the pound against the euro over the medium term, to keep the cross below 0.86 [GBP/EUR above 1.1627], it may not provide much more ammo for movement below 0.83 [GBP/EUR above 1.2048]”Herrera also said on Thursday.

GBPEUR per day

Above: Pound to Euro exchange rate shown at daily intervals with EUR / GBP.

  • Reference rate at publication:
    GBP to EUR: 1.1822 GBP to USD: 1.3407
  • High bank rates (indicative): 1.1590 1.3132
  • Payment specialists prices (indicative: 1.1763 1.3340
  • Learn more about specialized rates, here
  • Set up an exchange rate alert, here

Market prices changed to imply on Thursday that the BoE’s discount rate could rise nearly 1.19% by the end of 2022, implying a high but most likely erroneous probability that the benchmark for borrowing costs could reach 1.25% next year.

This bellicose change in expectations lifted the pound against most major currencies ahead of the festive break, allowing the pound-dollar rate to attempt a rally from the 1.34 grip that was lost in late November as GBP / EUR climbed back above 1.18.

“A firm break above the mid-point of 1.33 and a test of 1.34 (strong resistance) would make the GBPUSD technical picture bullish after bouncing off the 38.1% Fib retracement of the 2020-21 move to 1.3165 Support is the midpoint of 1.32 followed by the number, “Scotiabank’s Herrera also said.

The BoE’s interest rate bets have pushed the pound up in recent trading, though it will eventually face a perhaps inevitable memory of the market that the BoE said in August that she planned to focus on reducing her bond portfolio once the bank rate hits 1%.

There are other quantitative tightening measures that the BoE intends to start taking when the bank rate hits 0.5%, which will likely slow any rise in the benchmark and could mean it does. The discount rate is unlikely to reach 1.25% in 2022.

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The market’s eventual calculation with this could be a constraint on the pound over the next few months, although before that it will have to manage the risks posed by the Federal Reserve’s monetary policy and any further galloping price hikes in the l energy in Europe.

“It should be noted that the UK will be just as exposed to the energy crisis as Europe (UK has even less gas storage) and the BOE is already pretty much fully priced for February and 100bp + for November of next year – so I see more possibilities for US prices to rise against the BOE (the March Fed meeting could end up having an extra 10 basis points for example), ”explains Jordan Rochester, strategist at Nomura.

“I’m short on GBP / USD so naturally this move is concerning, but I suspect that this is largely a random Christmas market walk rather than the start of a new uptrend with the positive momentum from the already largely integrated BOE rate hikes, “Rochester wrote in a research briefing Thursday.

The pound and currencies of other energy-importing countries were also bolstered Thursday by reports suggesting that at least 30 tankers en route to Europe from the United States were carrying liquefied natural gas after a period of galloping inflation in natural gas prices.

As the transatlantic supply dampened prices ahead of the Christmas holidays, the pound could be vulnerable to further acceleration in percentage or even triple-digit price growth in some markets, if this has a positive impact on prices. inflation expectations.

Gas storage

Source: Nomura.

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“February and March will be a peak of fear for the energy markets and will weigh on real returns and growth. The UK is much more vulnerable to a gas shortage due to significantly lower storage levels (compare to Germany below) and the risk of the UK suffering from blackouts (yes, that’s quite possible hence the price action in Nat Gas). I don’t see an energy crisis that bodes well for the pound sterling if it happens, ”Rochester warned of Nomura this week.

Although all countries have seen sharp increases in energy costs this year – with global oil prices up by around 50% and some natural gas prices for future delivery by nearly 500% this year – the European countries are widely considered to be particularly at risk.

The price hikes have been highly inflationary as their persistence eroded real terms or inflation-adjusted returns obtained by sterling asset investors prior to the Bank of England’s decision to raise the bank rate by 0, 10% to 0.25%.

Inflation expectations fell as a result of the ruling, pushing real term bond yields in the UK up against those in Europe and apparently driving the pound up along the way, which could make it vulnerable to a further rise in energy prices.

“The price of natural gas in the Netherlands rose another 80% this month to a new record. It is now just over 40% above the peak reached in early October, when gas prices last rose. Similar price action is also evident in the UK natural gas market, ”said Lee Hardman, currency analyst at MUFG.

“Recent price action has reinforced our view that the energy price shock will hit European economies harder than the United States and further strengthen the relative attractiveness of the US dollar as the start of the decade approaches. ‘next year. It was only last week that the BoE and the ECB had to raise their inflation forecasts again. The BoE has signaled that it now expects a peak of 6.0% in April 2022, ”Hardman and colleagues said in a note Thursday.

GBP to USD per week

Above: Pound-to-dollar rate displayed at weekly intervals with major moving average and Fibonacci retracements of the 2020 rally indicating likely areas for technical support.

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