GBP/EUR could extend higher says ConveraBut advances continue to be frustratedEUR in demand on China reopeningAnd continued fall in gas prices

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The British Pound's recovery against the Euro could extend says an analyst at one of the UK's largest business payment providers.

George Vessey, an analyst at Convera, says a positive rebound in global risk sentiment has allowed the UK currency to climb higher against the Dollar, Yen and the Euro of late.

"After a 3% decline in three weeks, GBP/EUR posted a bullish weekly close last week and has started this week where it left off – extending higher, not far from the €1.14 threshold," says Vessey in a regular currency market briefing.

"The GBP/EUR reversal could gather steam," he adds.

Above: GBP/EUR at daily intervals showing key moving averages. Consider setting a free FX rate alert here to better time your payment requirements.

The Pound to Euro exchange rate (GBP/EUR) fell to a low of 1.1265 on December 30 and has since tracked a largely sideways range, peaking at 1.14037 on Monday, January 09.

But a failure to break the 1.14 threshold that Vessey identifies could yet result in a retreat back into recent ranges.

Indeed, a broad-based rally by the Euro on Monday saw Sterling bulls frustrated as GBP/EUR found itself back in the middle of its 2023 range, located around 1.1350.

With little by way of economic data due out of the UK until next week, it could be the Euro that proves the driving force of the GBP/EUR equation.

"The euro has recently benefited from hawkish European Central Bank (ECB) rhetoric, and a higher repricing of ECB interest rates to circa 3.5% as a possible peak this year, up from 2.8% before the ECB’s meeting last month," says Vessey.

Foreign exchange analysts at Barclays meanwhile say the reopening of the Chinese economy from the clutches of the strict zero-Covid approach is also aiding the Eurozone's single currency higher.

Analysts at the bank estimate that there is a further potential 5% upside in EUR/USD to be unravelled from the Chinese reopening story, which could pressure the GBP/EUR lower, or at the very least, continue to frustrate GBP/EUR advances.

Falling Eurozone gas prices - which are back to pre-Russian invasion levels - and elevated storage capacity are also aiding sentiment towards the Eurozone and its currency.

"Decreasing energy prices and warmer weather, erasing the immediate risk of an energy crisis, also reduces the risk of a deep Eurozone economic downturn, which is deemed euro-positive and gives the ECB more room for rate hikes, which could act as a headwind for GBP/EUR this quarter," says Vessey.

After the freezing weather in early December, temperatures quickly rebounded above the historical range, leading to deep cuts in consumption, with some estimates putting it 40% below the seasonal average.

Increased wind production and the return of French nuclear power stations have also aided the fall in prices.

Falling gas prices are of course also supportive of the Pound given the Eurozone and UK economies have both suffered under energy inflation over recent months.

But for now, at least, it looks as though the Euro is benefiting more from this story.

From a technical perspective, Vessey says GBP/EUR is trading below its key moving averages, which is a bearish sign.

"But an attempt to test these levels, starting with the 50-, 100-day and 200-week averages, all located just under €1.15, could be an upside target for the currency pair over the coming week or so," he notes.

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GBP/EUR had been trading below €1.13 and close to multi-month lows against the Euro when Eurozone inflation came in lower than was expected in December, allowing for a recovery to take place.

The Euro retreated as investors questioned whether the below consensus inflation reading meant the European Central Bank could reconsider its stated aim of raising interest rates by 50 basis points at the next two meetings, thereby denying the currency of a recent source of support.

For Sterling to extend higher global markets must, at the very least, remain supportive.

Last week saw the release of the U.S. job report for December where wage growth surprised to the downside of market expectations while seperate data showed a sharp slowdown in the services sector, which triggered a market rally that assisted the 'high beta' UK Pound.

The subsequent fall in U.S. government bond yields and resulting losses for the Dollar have been a balm for risky assets including currencies like the Pound which rallied against the Dollar, Yen and Euro.

"The GBP has a higher beta to risk and should continue to benefit from any further recovery of risk sentiment," writes Valentin Marinov, head of FX strategy at Credit Agricole CIB, in Thursday market commentary.

Supportive global markets are therefore a necessary prerequisite for the Pound to remain supported against the Euro and the Dollar, however, Marinov says it will also be incumbent on the UK economy to deliver better-than-expected data to drive any outperformance.

"We continue to doubt that the GBP can recover meaningfully further vs the USD and EUR without any meaningful improvement of the UK data," he says.

Next week will be a busy one in this regard as the UK will see labour market, inflation and retail sales figures released.