British pound to euro exchange rate rallies above EUR 1.15

• British pound to euro (GBP/EUR) exchange rate hits fresh 10-month best
• Pound Sterling (GBP) supported by improving UK fundamentals and vaccine optimism
• British pound to euro (GBP/EUR) rate reacts to UK inflation figures
• Some analysts suggest British pound vs euro cross is overvalued

Pound Sterling (GBP) continues to outperform in foreign exchange (FX) markets, supported by COVID-19 Vaccine hopes and the ongoing improvement in global investor sentiment.

The British pound to euro (GBP/EUR) exchange rate soared to its highest levels since April 2020 on Thursday and could extend gains if the UK’s COVID-19 vaccination programme continues to impress.

At the time of writing, GBP/EUR is trading 0.3% higher at EUR 1.1542, albeit the British pound to euro rate hit EUR 1.1554 earlier during the session.

Several analysts and currency strategists have suggested that the EU’s slow vaccine rollout is triggering upside in the British pound euro (GBP/EUR) exchange rate.

According to the latest statistics, 5% of EU residents have received their first COVID vaccine, compared to the UK, which has inoculated approximately 25% of its population in less than ten weeks.

The unfavourable contrast between the UK and Eurozone’s vaccine rollout has fuelled upside in the pound to euro (GBP/EUR) cross.

The UK government also hopes to have an additional 32 million people vaccinated by May, which could continue to underpin pound Sterling (GBP) in the near-term by supporting the UK’s recovery outlook.

Earlier this month, the Bank of England (BoE) revised its economic projections for the economy, noting that the UK’s rapid vaccine rollout should result in an earlier easing of lockdown restrictions permanently and trigger a swift rebound in Q2 2021.

HSBC has also made upward revisions to its growth forecasts due to the ongoing success of the UK’s rapid COVID-19 vaccination programme.

Although they expect the BoE to continue adopting a relatively dovish stance due to the economic downturn and the impact of Brexit, HSBC expects UK output to grow by 4.7% in 2021, up from 4.3%.

HSBC also predicts UK gross domestic product (GDP) rising by 5.4% in 2022 versus previous forecasts of 4.5%.

While the euro (EUR) could reclaim losses amid signs that the EU’s vaccine rollout is accelerating, the British pound to euro (GBP/EUR) rate could extend its impressive run higher if the single currency continues to struggle against the US dollar (USD).

Several analysts have said the euro (EUR) was overvalued against the US dollar (USD) in the latter part of 2020 – a view that corresponds with the stance of the European Central Bank (ECB).

ECB policymakers made several attempts to talk down EUR strength after the euro to US dollar (EUR/USD) exchange rate breached USD 1.20.

Suppose EUR/USD continues to weaken in 2021 while the British pound to US dollar (GBP/USD) exchange rate holds onto its advances, the pound to euro exchange rate would appreciate on a cross-currency basis.

Pound Sterling (GBP) could also gain amidst ongoing signs that UK fundamentals are improving. The latest being UK inflation data, which ticked higher in January and beat forecasts.

UK inflation jumps to 0.7% in January

According to the Office for National Statistics (ONS), UK inflation rose from 0.6% in December 2020 to 0.7% in January, versus preliminary estimates of a fall to 0.5%.

While clothing and footwear prices dipped, the cost of food and household goods increased, driving the inflation rate higher.

Although UK inflation remains significantly lower than the Bank of England’s (BoE) 2% target, many economists predict the Consumer Price Index (CPI) rising to 2% by 2021-end once stimulus measures and tax cuts designed to support the UK out of the pandemic expire.

With no economic indicators out today, pound Sterling (GBP) will continue to be driven by broader risk sentiment and vaccine developments, which should ensure the UK currency remains elevated against the euro (EUR).

However, some FX analysts have warned that GBP/EUR is overvalued and that the British pound’s (GBP) bullish run could stall in the medium-term as data begins to reveal the Brexit impact on UK economic growth.

British pound vs euro exchange rate overvalued?

One analyst at the leading investment bank, JP Morgan, said that the British pound (GBP) could come under significant pressure if the UK economy fails to get a head start in the recovery game.

While the multinational investment bank has upwardly revised GBP forecasts, JP Morgan analyst, Paul Meggyesi, believes pound Sterling (GBP) will struggle to maintain its bullish momentum as pandemic drama subdues and investors refocus on Brexit.

The UK will have its first taste of post-EU trading in nearly 48 years, and this will likely have a significant impact on the outlook for the British pound to euro (GBP/EUR) exchange rate for 2021.

JP Morgan expects the British pound to euro rate to rise to EUR 1.1363 by year-end, up from the previous forecasts of EUR 1.1235. However, given that GBP/EUR is currently trading above the EUR 1.15 level, the currency pair appears to be already showing signs of a modest overvaluation.

ING Bank FX Strategist, Francesco Pesole, appears to share the same view, noting that “we could see more GBP overvaluation overshoots now that Brexit uncertainty is out of the equation.”

He said that any further upside on such an overvaluation would likely depend on the euro’s (EUR) strength against the US dollar (USD).