Nordic corporate bank SEB have announced they forecast the Pound to hold an upside bias against the Euro. The bank has backed Sterling over the Euro since the beginning of the year, suggesting several trades depending on the view that EUR/GBP "would head lower". 

As part of an update published this month, SEB say they "once again believe in the downside,” referring to a potential interest rate hike in May next year. 

Sterling’s rally earlier this year – which saw GBP/EUR increase from 1.1184 in January to 1.1800 in April – was down to Brexit and coronavirus uncertainties being left behind by markets, according to SEB.

Britain’s rapid Covid vaccine rollout permitted the market to concentrate on the Pound’s "cheap valuation and prospects for recovery".

The bank added that the next driver for additional gains for Sterling depends on the Bank of England.

The forecast the BoE to "cautiously hike its key rate in May 2022 and stop its quantitative easing programme ahead of time in November, which should lend GBP further support."

The crucial event coming up for the Pound is Thursday's September policy meeting. Although policy changes are forecast, guidance may prove significant.

Analysts forecast a rate hike in the first half of next year, but the quantitative easing programme would be finalised in December as scheduled. As such, SEB’s prediction the programme will end in November would prove a hawkish surprise that could support the currency.

A rate rise in Q1 2022 would put the BoE ahead of the U.S. Federal Reserve and European Central Bank, giving Sterling exchange rates a potential upside benefit.

"As the market has rewarded currencies with central bank support, we expect EUR/GBP to resume a clearer trend lower targeting 0.83 and would stop the trade on a break above July highs at 0.8650," SEB stated.

EUR/GBP at 0.83 gives a Pound-to-Euro exchange rate of approximately 1.2050. EUR/GBP at 0.8650 gives GBP/EUR of 1.1560, Pound Sterling Live reports.