Dec 31, Reuters -- Sterling hit its highest level against the euro since the end of February 2020, easing concerns about the economic impact of the epidemic 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 are trying to limit the economic damage by relaxing rules on isolation rather than resorting to lockdowns despite coronaviruses hitting record highs.
The sterling is a risk-on currency that will benefit from the huge financial and fiscal stimulator and a more benign pandemic outlook, said Enrique Diaz, chief risk officer at Ebury. Ebury's short-term target for the pound is at pre-pandemic levels of around 83 pence per euro.
Central banks are going to leave a lot of stimulative policies in place for the foreseeable future, even with the removal of monetary accommodation. He said that this is positive for risk-on currencies and positive for the sterling.
The pound was up 0.1% against the euro at 84 pence per euro after hitting its highest level since February 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 are expecting to see a 100 basis points rise from BoE by the end of 2022, which is a 95% chance of that.
Diaz argued that the Bank of England, which will probably be faster than the Fed to taper its monetary policy, will be one of the drivers of a potential rise of sterling in 2022.