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The European Central Bank's recent policy swivel might just have put paid to any prospect that Pound Sterling will deliver new highs against the Euro this year shows new research.

Commerzbank finds that the Euro will begin to recover against the Pound from the second quarter through to the end of the year, although the Dollar will prove resistant to advances by both European currencies.

Commerzbank's economists have reacted to market consensus that now expects a first interest rate hike to come from the ECB before the end of 2022, which should prove a source of support for the Eurozone's single currency.

"The ECB to raise interest rates for the first time as early as September. A further step should follow in December," says You-Na Park-Heger, FX and EM Analyst at Commerzbank. "This should support EUR/GBP."

The Euro fell to two-year lows against the Pound in February when it reached 0.82852, giving a Pound to Euro rate high of 1.2070.

But the ECB signalled at its February 03 policy update that rising inflation meant it would need to consider tightening policy, validating market expectations for 2022 rate hikes in the process.

The Euro rallied on this swivel in policy from a central bank that has for years been loathe to entertain near-term rate hikes lest they undermine efforts to boost economic growth and raise inflation to their mandated 2.0% level.

Reference rates at publication:

Pound to Euro: 1.1880 \ Pound to Dollar: 1.3515

High street bank rates (indicative): 1.1650 \ 1.3237

Payment specialist rates (indicative): 1.1820 \ 1.3447Find out more about specialist rates and service, hereSet up an exchange rate alert, hereBut inflation is now closer to 5% thanks to the pandemic and this has encouraged demands from members of the ECB's Governing Council to bring an end to the Bank's Negative Interest Rate Policy, introduced in 2014.

As the ECB prepares to hike Commerzbank anticipates the Euro to remain supported, potentially denying the Pound to Euro exchange rate another run at its 2022 highs just north of 1.20.

For its part the Pound should nevertheless still remain relatively supported in the first quarter as the Bank of England is anticipated to raise interest rates again.

"Further rate hikes will follow in the course of the year," says Park-Heger.

The ECB might also prove reluctant to encourage interest rate hike expectations much further from here as ECB monetary conditions are already tightening via the higher bond yields that rising expectations generate.

"The ECB is likely to try to dampen expectations of interest rate hikes for the time being," says Park-Heger.

ECB Chief Economist Philip Lane on Thursday pushed back against such expectations in an official ECB blog post, saying Eurozone inflation remains almost exclusively driven by supply and demand mismatches that have resulted from the pandemic.

He says the prospect of second-round inflationary pressures - notably a wage spiral - remains remote and the Eurozone's labour market is nowhere near as tight as the U.S. market's.

He urged patience on policy tightening as a result.

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"The ECB is likely to hike only two times and then stay on hold," says Park-Heger. "We expect the GBP to appreciate in 2023 again."

Commerzbank's forecasts for the EUR/GBP exchange rate are for 0.83 to be reached by end-March, 0.85 by end-June, 0.86 by end-September and 0.87 by end-December. By end-December 2023 the rate is expected to be back towards 0.83.

This gives a GBP/EUR profile of 1.2050, 1.1765, 1.1630 and 1.15 ahead of a return to 1.2050 later in 2023.

The Dollar is meanwhile expected to retain support as the Federal Reserve races to raise rates in the face of rising U.S. inflation.

"Against the USD, we expect more or less a sideways movement, as both the BoE and the Fed will become more restrictive, the BoE has started a tad earlier, but the Fed is likely to follow suit at a faster pace from March," says Park-Heger.

Commerzbank's GBP/USD forecast profile sees 1.35 by end-March, 1.34 through the second and third quarters ahead of 1.33 by year-end. 1.35 is seen by year-end 2023.