GBP/EUR records strongest quarter since 2015 amid optimism

• British pound to euro (GBP/EUR) exchange rate rallies to one-year best
• Pound Sterling (GBP) supported by growing optimism over the UK economy despite covid vaccine challenges
• US dollar (USD) strength preventing GBP/USD from reaching 2021 highs
• British pound to Australian dollar (GBP/AUD) pair boosted by US President Biden’s infrastructure plan

Pound Sterling (GBP) has advanced by approximately 5% against the euro (EUR) during the first quarter of 2021 – its strongest quarter since 2015.

With Brexit now in the background and recent economic indicators pointing towards a robust recovery for the UK economy, investors have found the UK currency more appealing this week.

While concerns over a COVID-19 vaccine shortage in April could exert downward pressure on pound Sterling (GBP) exchange rates, as the UK is already significantly ahead in the race to immunisation and the Novavax jab could be deployed in May, losses should be limited.

The UK’s improving fundamentals also underpin a solid technical picture for the British pound (GBP) that carves a path for further upside.

According to technical analysis from Commerzbank leading analyst Axel Rudolph, the British pound to euro (GBP/EUR) pair will continue its ascent and stabilise above EUR 1.18 in the near term.

If the currency pair does not stabilise at these levels, it’s expected  GBP/EUR to advance to highs of EUR 1.21 before encountering any significant resistance.

Mr Rudolph analysis comes as the British pound vs euro (GBP/EUR) currency pair consolidates above EUR 1.17 – which it had difficulty doing for the majority of March.

While GBP/EUR is trading flat heading into the North American session, it remains near its best levels at EUR 1.1755.

Weakness being seen in GBP/EUR could also have more to do with US dollar (USD) strength than pound Sterling (GBP) weakness as recent US developments have prompted a shift in risk appetite and increased the appeal of safe-haven assets such as the euro (EUR).

Several foreign exchange (fx) analysts expect any losses in GBP/EUR will be temporary given that the divergence in fortunes between Britain and the Eurozone continues to widen.

Not only did the Office for National Statistics (ONS) reveal that UK gross domestic product (GDP) data for Q4 2020 beat forecasts this week, but today’s UK Manufacturing PMI release showed that activity rebounded in March.

Separate data has also shown that business confidence surged to a seven-year high last month, with Britain’s progressive vaccination drive touted as the reason for the renewed sentiment.

Pound Sterling (GBP) outlook supported by UK economic data

According to the British Chambers of Commerce (BCC) Quarterly Economic Survey (QES), 55% of respondents said they expect turnover to grow over the next 12 months.

After being criticised for its handling of the coronavirus pandemic, public opinion towards the UK government’s approach to the crisis has turned increasingly optimistic. As a result, firms and investors are gaining confidence in the UK economy’s recovery outlook.

Upward revisions to UK GDP has also boosted optimism over Britain’s long-term prospects, compared to the Eurozone, which posted disappointing inflation data on Thursday.

The bloc’s largest economy, Germany, also amplified downward pressure on the single currency today after labour data revealed that unemployment in the country accelerated by 8K, versus consensus estimates for an increase of 3K.

That said, Rabobank senior FX strategist Jane Foley warns that GBP could still be subject to some “choppy trading conditions” as the UK has a long way to go before it returns to its pre-pandemic levels.

The euro (EUR) could also find support this month if the bloc’s vaccine rollout accelerates. European leaders have been heavily criticised for the EU’s vaccine fiasco; however, officials confirmed this week that the continent should receive a significant delivery of COVID jabs.

It comes as vaccine supplies in the UK grow scarce due to a delivery delay from an AstraZeneca plant in India. Given that vaccine rollouts are considered the answer to exiting the pandemic and reopening the economy, a slowdown in rollouts could trigger headwinds for GBP/EUR.

US dollar (USD) strength could also contribute to weakness in pound Sterling (GBP) exchange rates. Despite growing optimism over the UK economy’s recovery outlook, the British pound to US dollar (GBP/USD) exchange rate remains relatively unchanged on Thursday.

GBP/USD remains pressured by greenback strength

As of 17:00 GMT, the British pound to dollar (GBP/USD) pair is trading 0.3% higher at USD 1.38, boosted by optimism that Prime Minister Boris Johnson’s lockdown exit roadmap will trigger a robust recovery in the UK economy in the second half of the year.

However, US dollar (USD) strength has prevented GBP/USD from hitting February highs, and further volatility in the currency pair is likely following President Joe Biden’s USD 2TN infrastructure announcement.

While growing optimism should ensure GBP remains well supported against other G10 currencies, President Biden’s new infrastructure plan would further boost the US economy’s recovery outlook, which would more than likely translate into further USD gains.

Although Republicans oppose the plan, which could prevent or delay it from being passed through Congress, foreign exchange (FX) market participants are already enthusiastic about the prospect.

According to a tweet from President Biden, the infrastructure project, dubbed “The American Jobs Plan”, will:

• Modernise 20,000 miles of highways, roads, and main streets
• Repair 10,000 bridges desperately in need of upgrades
• Replace 100% of our nation’s lead pipes and service lines

The plan also appears to have made investors more hesitant to take risks, which could weigh on GBP/USD over the coming month.

USD traders will now be looking ahead to Friday’s release of US labour market data. If the figures disappoint, this could reduce the greenback’s appeal. However, signs that the US labour market is recovering would aid the US currency higher and push riskier assets lower in currency markets.

GBP/AUD could continue to edge higher amid the risk-averse mood

With most economies closed on Friday and Monday for the Easter holidays, the British pound to Australian dollar (GBP/AUD) exchange rate will continue to be driven by sentiment, which US economic indicators will likely influence.

After a week of primarily mixed movement, GBP/AUD has rallied ahead of the bank holiday and is trading 0.2% higher at AUD 1.8178 as we enter New York trading hours.

The currency pair briefly hit a quarterly best earlier in the session, soaring to AUD 1.8264 after IHS Markit published stronger-than-expected UK manufacturing data.

While Australia’s economic outlook remains relatively positive, upgrades to UK growth projections are buoying momentum in GBP/AUD.

Furthermore, Australia’s trade surplus revealed an unexpected drop in exports, which has made the “Aussie” dollar hypersensitive to shifts in sentiment.

With investors currently hesitant to take risks following Joe Biden’s infrastructure plan announcement, the British pound to Australian (GBP/AUD) cross could continue its ascent in FX markets.

Next week’s Reserve Bank of Australia (RBA) policy decision could also trigger headwinds for AUD/GBP if policymakers are notably dovish.