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Pound Sterling has broken to its highest levels of 2023 against the Euro with the breach of the 200-day moving average on the charts being of technical significance, although analysts warn the risk of disappointment at the Bank of England on Thursday is high.
"EUR/GBP has officially cracked through the 200-day moving average and seems to get some escape velocity to the downside now," says W. Brad Bechtel, Global Head of FX at Jefferies LLC.
The inverse of the above is shown in the Pound to Euro rate (GBP/EUR) breaking above its 200-day moving average:
Above: GBP/EUR at daily intervals showing recent range and break above 200-day moving average.
"GBP/EUR has opened above €1.15 for the first time since mid-December last year as the euro comes under selling pressure. Sterling is one of the best-performing currencies of 2023," says George Vessey, FX analyst at Convera.
The move higher in the Pound-Euro exchange rate to a new interim high at 1.1516 comes just ahead of Thursday's important Bank of England meeting, which should see a further 25 basis point rate hike.
"The approach of the BoE and ECB is likely somewhat similar now with both nearing the end of their rate hiking cycle and both likely going to give us around 50bps to 75bps total before all is said and done and likely in 25bps increments," says Bechtel.
The Eurozone and UK economy have performed better than expected thus far in 2023 thanks largely to falling gas prices. However, Jefferies says the recent outperformance of the Pound against the Euro could be explained by marginal economic outperformance in the UK.
"The data in the UK has been performing better at the margin with some resilience in the consumer despite the cost of living crisis and this is perhaps helping the GBP outperform," says Bechtel.
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But should the Bank of England caution that the market expects too much by way of further rate hikes - a trademark complaint of the UK's central bank - then Pound Sterling could see a setback.
"As the BoE has been quite hesitant and cautious as regards the fight against inflation it is difficult to believe that it will surprise with a hawkish stance on Thursday," says You-Na Park-Heger, FX Analyst at Commerzbank. "The BoE's concerns that the monetary policy tightening totalling 415 bp since early 2022 might slow the economy excessively are unlikely to have evaporated."
"I therefore see a certain potential for disappointment and thus the risk of a downside correction in Sterling as the market’s rate expectations seem quite ambitious," says Park-Heger.
Bechtel says any disappointment on the part of the Bank of England could see the GBP/EUR exchange rate revert back to the 200dma, currently located at 1.1450.
A continued move higher in GBP/USD relative to EUR/USD will also be important in determining where EUR/GBP travels.
If GBP/USD punches through the May 2022 highs, "then EUR/USD needs to get on its horse or EUR/GBP will continue to drop like a stone," says Bechtel.
But the Pound's recent outperformance can also be explained by the ongoing stability in the UK's banking sector relative to the U.S. and, to a lesser extent, Europe.
Global markets fell last week on news of fresh turmoil in a number of regional U.S. lenders, but Sterling put half a per cent on both the Euro and the Dollar in moves that echoed FX market moves around the SVB and Credit Suisse crises.
"Far larger banking sectors in the U.S. and Europe may be helping the pound in this environment with investors more confident of the UK banking sector avoiding any nasty surprises than in the U.S. or the euro-zone," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank.
This week has seen nerves concerning U.S. banks ease, but economists and financial market analysts remain wary. Any fresh bouts of nerves could aid further gains in Sterling.
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