Sterling hit its highest level against the euro since the end of February 2020 as easing concerns about the economic impact of the pandemic boosted risk-on currencies, while analysts expect more rate rises from the Bank of England in 2022.
Risk appetite was supported by signs that governments, despite coronavirus
cases hitting record highs, are trying to limit the economic damage by relaxing rules on isolation rather than resorting to lockdowns.
“The sterling is a risk-on currency that will benefit from the huge financial and fiscal stimulus and a more benign pandemic outlook,” Enrique Diaz, chief risk officer at Ebury, said. Ebury's short-term target for the pound is at pre-pandemic levels of around 83 pence per euro.
“Even with the removal of monetary accommodation, central banks are going to leave significantly stimulative policies in place for the foreseeable future. This is positive for risk-on currencies and is positive for the sterling,” he added.
Sterling was up 0.1% against the euro at 84 pence per euro , after hitting its highest level since Feb. 26, 2020 at 83.69. It was edging down 0.1% versus the dollar at $1.3485 , within striking distance of its highest since November 10.
Markets currently price in about a 95% chance of a 100 basis points rate rise from BoE by the end of 2022.
“The Bank of England, which will probably be faster than the Fed to taper its monetary stimulus, will be among the key drivers” of a potential rise of sterling in 2022, Diaz argued.