The Bank of England expects to see more rate rises in 2022 as the risk-on currencies ease concerns about the impact of the pandemic on the currency, while analysts expect that sterling will hit its highest level against the euro since the end of February 2020.
Risk appetite was supported by signs that governments are trying to limit economic damage by relaxing rules on isolation rather than resorting to lockdowns despite coronaviruses hitting record highs.
Enrique Diaz, chief risk officer at Ebury, said the sterling is a risk-on currency that will benefit from the huge financial and fiscal stimulator and a more benign pandemic outlook. His short-term target is at 83 pence per euro, at pre-pandemic levels.
Even with the removal of monetary accommodation, central banks are going to leave significant stimulative policies in place for the foreseeable future. He said that this is positive for risk-on currencies and positive for the sterling.
The pound was up 0.2% against the euro, at 83.7 pence per euro its highest level since February 26, 2020. It was edging up 0.1% versus the dollar at $1.3516, within striking distance of its highest since November 10.
Markets are expecting to see a 100 basis point rise from BoE by the end of 2022, according to a 95% chance of that.