Euro-to Pound (EUR/GBP) losses during the first quarter of 2021 were driven by the UK vaccine programme, but HSBC now expects a reversal as the EU performance improves strongly.
The bank recommends buying the EUR/GBP exchange rate with a target of 0.8888.
EU to Take-up the Vaccine Baton, Euro to Strengthen
HSBC notes that the initial optimism over the UK vaccine programme was justified, but this has now been priced in. “The commendable vaccine rollout has been so well covered, it is hard to know how it might add further to GBP’s appeal.”
HSBC now expects that attention will switch towards the EU programme and there is scope for a big improvement in the EU performance which will underpin the Euro-zone outlook.
“In particular, the eurozone’s vaccination programme may move from being a headwind to being a EUR support as supplies accelerate in the coming weeks.”
The bank also notes that the Euro-zone economic data has signalled resilience.
HSBC expects that the Euro to Dollar (EUR/USD) exchange rate will make further headway on the back of an improved Euro-zone outlook. Overall it expects both the dollar and Pound to lose out in the short term.
The bank also notes that underlying investment demand for the Pound has faded, increasing the dependence on speculative inflows.
“Our flow data also show that the momentum in speculative interest to sell EUR and buy GBP has disappeared.”
HSBC, however, also notes that speculative buying interest for the Pound is liable to fade which will create further headwinds for the UK currency.
In this context it notes; “Speculative inflows are a necessary but not always a sufficient condition for GBP advancement.”
Looking at price action, HSBC comments; “The cross bounced aggressively off 0.8500 and has faltered ahead of 0.8700, which provided some resistance in late February 2021 and frequent support in April and May 2020.”
EUR/GBP weakened to 0.8610 on Monday despite Euro to Dollar (EUR/USD) exchange rate gains.