Weekly Update: Pound Hits Eight-Month High vs Euro as UK Inflation Betters Forecast

GBP/EUR – Higher UK Inflation Offers Pound Encouragement

Demand for the Pound picked up sharply after the headline UK inflation rate picked up further than forecast in December.

As inflation rose to 0.6% on the year, GBP exchange rates received a solid boost across the board, with the odds of any potential Bank of England (BoE) policy action diminishing.

With inflation rising again, the case for any further monetary loosening appeared to weaken, even as the UK economy looks set to remain under pressure for the foreseeable future.

However, with forecasts pointing towards a negative first quarter CBI business optimism index, the Pound could still face weakness this week as worries over the impact of the pandemic persist.


GBP/USD – Threat of Double-Dip Recession Weighs on Pound Outlook

Although November’s monthly UK GDP reading didn’t prove as weak as forecast, GBP exchange rates still came under pressure on Friday.

As growth contracted -2.6% on the month, this highlighted the negative impact of the second national lockdown, increasing the risk of the UK experiencing a double-dip recession.

GBP exchange rates could face further losses with the release of January’s manufacturing and services PMIs.

While forecasts point towards another solid monthly performance from the manufacturing sector, the services PMI is expected to remain trapped in contraction territory, adding to fears of a sustained economic slowdown.


USD/GBP – US Dollar Shakes Off Surge in Initial Jobless Claims

A sharper-than-expected increase in initial jobless claims failed to keep the US Dollar down for long last week.

While the labour market showed fresh signs of deterioration, a sense of optimism over the incoming Biden administration and further fiscal stimulus measures gave investors cause for confidence.

Even so, another significant uptick in jobless claims on the week could still put a dampener on USD exchange rates on Thursday.

An easing in political turmoil could limit the appeal of the US Dollar, meanwhile, as the prospect of increased US stability after Joe Biden’s inauguration may encourage markets to return to a state of risk appetite.


EUR/USD – Rising German Confidence Lifts Single Currency

January’s German ZEW economic sentiment survey gave the Euro a fresh boost, with the index picking up further than forecast on the month.

Evidence of increased optimism within the Eurozone’s powerhouse economy saw the single currency trending higher against its rivals, even as the prospect of extended coronavirus restrictions loomed.

However, while no change in monetary policy is expected from the European Central Bank’s (ECB) January policy announcement this could still provoke Euro volatility.

If policymakers express any anxiety over the strength of the economic outlook, this may give investors incentive to sell out of the single currency, even if the prospect of any actual action remains distant.

Louisa Heath

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