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What next for EUR/GBP amid ECB-BoE policy split, Covid risks?

By Piero Cingari

Edited by Anil Varma

08:00, 24 November 2021

1 pound and 1 euro coins
Euro versus pound – Photo: Shutterstock

The euro is trading near a 21-month low against the pound, on the prospect of a widening monetary-policy divergence between the eurozone and the UK. A resurgence of Covid-19 in continental Europe, which threatens the region’s fragile economic recovery, also has weighed on the single currency.

The European Central Bank has signalled that it is in no hurry to withdraw the extraordinary monetary accommodation – in the form of asset purchases and record-low interest rates – put in place to support the economy. Sterling, on the other hand, has been supported by the prospect that the Bank of England could become the first major central bank to raise borrowing costs since 2018.

Recent British economic data indicated a significant improvement in both the nation’s labour-market conditions and inflation dynamics, temporarily putting Brexit anxieties to rest and boosting market confidence in the pound. Should the BoE kick off a rate-increase cycle in the near term, that would boost the UK currency’s appeal against lower-yielding peers such as the euro.

EUR/GBP forecasts: where next for the forex pair?

The euro-sterling pair traded near 0.84 on Wednesday, close to the lowest level since February 2020 of 0.8380 reached last week. What are experts currently expecting for the pair? Let’s take a look at the latest analyst views and predictions for EUR/GBP.

a table showing banks' forecasts on EUR/GBP including Bank of America, BNP, Danske Bank, Intesa Sanpaolo, ING, Commerzbank, ABN Amro, Toronto Domino, BBVABanks' forecasts on EUR/GBP – Credit:
  • Bank of America: A December rate hike by the BoE is “no longer a certainty” after the central bank pushed back against market expectations for monetary tightening at its meeting earlier this month, strategists at the US bank wrote in a research note. They expect the first UK rate increase, a 15 basis point move, to come in February, followed by a 25 basis point addition in May. The pound may face headwinds if the BoE does not deliver the amount of rate hikes priced in by the market, and this could lead to EUR/GBP rising back towards 0.86.
  • ING Groep analysts believe that a BoE rate hike is more likely next month than in February, but doesn’t expect the UK monetary authority to follow aggressive policy tightening in 2022. The Dutch bank forecasts EUR/GBP to trend lower to 0.83 by June next year and to 0.82 by the end of 2022.
  • Danske Bank is positive on the sterling in the medium term, targeting EUR/GBP at 0.83 by the end of 2022, but is more cautious in the short term. Analysts at the bank see the BoE lifting rates by 15 basis points in February, followed by a 25 basis point move in May and another 25 basis points in November 2022, according to a note to clients. The Danske Bank research team expects that a stronger-dollar environment would also benefit the pound, but adds that the market pricing for about 110 basis points of BoE rate increases by end-2022 is too aggressive and that Brexit-related uncertainty may boost near-term volatility on EUR/GBP.

BNP sees EUR/GBP falling to 0.82 in 2022

  • BNP Paribas: The prospect of monetary divergence suggests EUR/GBP will likely trend lower, hitting 0.82 in 2022 and 0.80 in 2023, according to BNP Paribas. Rate hikes will benefit the GBP going forward, and even though EUR/GBP is presently trading at its long-term equilibrium level, the French bank expects the UK economy to outperform, causing the pair to trade below equilibrium level in the coming years.
  • Commerzbank: Brexit will remain a drag on the UK economy, putting downward pressure on the pound, according to Commerzbank which targets EUR/GBP at 0.88 in a year from now.
  • Intesa Sanpaolo expects a mixed trend in sterling, with a propensity to remain defensive versus the dollar while outperforming the euro. The Italian bank’s latest forecasts see EUR/GBP heading towards 0.83 in 12 months.
  • BBVA analysts expect an improving UK labour market to keep the GBP supported into the December meeting, assuming that global-market sentiment does not worsen materially and that the EU-UK political tensions don't worsen. The Spanish bank is medium-term bullish on the pound and targets EUR/GBP at 0.80 for December 2022.
A chart showing the short-term yield spread between UK and Germany against the performance of the sterling-euro exchange rate1-year UK/Germany yield spread vs GBP/EUR exchange rate – Credit: Koyfin

Monetary-policy divergence

The theme of monetary-policy divergence between the UK and the euro area appears to be the main headwind for EUR/GBP, according to analysts.

ECB President Christine Lagarde reiterated last week that the institution is in no hurry to raise rates next year, despite acknowledging increasing price pressures. On Friday, BoE Chief Economist Huw Pill signalled that the case for a policy-tightening move as early as next month was getting stronger.

The prospect of a policy split between Britain and the continent is reflected in the widening short-term bond yield differentials between the UK and Germany. The one-year spread has increased over the past two months to 116 basis points from 80.

The widening of the gilt-schatz spread reflects expectations that the BoE will move ahead of the ECB in normalising monetary policy from the current ultra-easy levels. As the chart above shows, a larger yield spread has coincided with the pound’s recent strength against the euro. 

EUR/GBP: euro-zone Covid-19 risks

The euro area appears to be facing a bigger risk of Covid-related economic disruptions than the UK this winter, and that’s another potential negative for the euro against sterling.

A chart showing the incidence of Covid-19 cases per million of population in the UK and GermanyDAILY NEW CONFIRMED COVID-19 CASES (PER 1M) – Credit: COVID-19 Data Repository by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University, Published online at Retrieved from: ‘https://https://ourworldindata.or

Across the European Union, the number of Covid-19 infections and hospitalisations have been on the rise in recent months, prompting some countries to reinstate restrictions on public mobility. Austria imposed a complete 20-day lockdown with mandatory vaccination since February, while German Health Minister Jens Spahn did not rule out the option of reimposing extensive restrictions. 


1.10 Price
-0.050% 1D Chg, %
Long position overnight fee -0.0080%
Short position overnight fee -0.0002%
Overnight fee time 22:00 (UTC)
Spread 0.00006


1.27 Price
+0.020% 1D Chg, %
Long position overnight fee -0.0047%
Short position overnight fee -0.0035%
Overnight fee time 22:00 (UTC)
Spread 0.00013


0.66 Price
-0.180% 1D Chg, %
Long position overnight fee -0.0071%
Short position overnight fee -0.0011%
Overnight fee time 22:00 (UTC)
Spread 0.00006


147.25 Price
-0.140% 1D Chg, %
Long position overnight fee 0.0111%
Short position overnight fee -0.0194%
Overnight fee time 22:00 (UTC)
Spread 0.010

In the UK, the bar seems to be set higher for bringing back restrictions, at least according to the latest comments from Prime Minister Boris Johnson.

While Covid-19 case numbers are similar between the UK and Germany, the same cannot be said about hospitalisations. Hospital admissions in Britain are now much lower than during previous Covid-19 waves, while numbers in Germany are rising faster again and intensive care units are already overwhelmed in some regions.

A chart showing the number of COVID-19 patients in intensive care units per million people in the UK and GermanyNUMBER OF COVID-19 PATIENTS IN INTENSIVE CARE (ICU) PER MILLION – Credit: European Center for Disease Prevention and Control (ECDC), Published online at Retrieved from: '’

Why the UK has done better in managing Covid

So why is the UK able to better cope with Covid-19 than Germany at this stage?

Discrepancies in vaccination rates between the UK and Germany are unlikely to explain this, and it's probably the "statistical coverage" of the pandemic that matters more, according to the Commerzbank Economic Research Team.

The UK does around seven times as much coronavirus testing as Germany does, and most crucially, it conducts systematic testing of vaccinated individuals as well. With a similar testing method, infection rates in Germany could be higher. In fact, data show that the share of positive Covid-19 tests is about 17% in Germany, compared with slightly less than 5% in England.

A chart showing the share of COVID-19 positive tests in the UK and GermanyPOSITIVE TEST RATE – Credit: Department of Health and Social Care and Public Health England; Robert Koch Institut, Published online at Retrieved from: ''

EUR/GBP technicals: after the ‘death cross’

On the four-hour chart, EUR/GBP is trading in a descending channel, with prices hovering around the lower limit.

Recently, the 50-day simple moving average (SMA) crossed below the 200-day SMA, forming the so-called “death cross”, a technical chart pattern that is widely taken as a bearish signal.

Technical chart on EUR/GBPEUR/GBP Technical analysis – Credit: Tradingview

A break below the downward channel could put the 0.8280 level, which corresponds to the lows of February 2020, in sight towards the lower side. On the other hand, a rebound from the current levels could potentially maintain the pair within the channel, as the market awaits more signs on the macroeconomic outlook.

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