Pound Euro Exchange Rate Hits 21-Month High as BoE Governor Warns of ‘Risks Both Ways’ in Inflation

Pound Euro (GBP/EUR) Holds €1.19 as Covid-19 Surge Hits Eurozone Consumer Confidence

(Updated 16:15, 22/11/21) The Pound Euro exchange rate held above €1.19 through Monday’s European session despite the Pound struggling for support.

However, Eurozone consumer confidence figures for November fell to a seven-month low and limited GBP/EUR losses.

Data revealed confidence dipped more-than-expected with a reading of -6.8, below forecasts of -5.5 and down on -4.8 the month before.

Surging cases of Covid-19 across Europe and concerns of new restrictions have hit household morale going into winter.

Bert Colijn, Senior Economist at ING commented:

“Uncertainty for consumers seems to be stemming from two big issues. The rising cases of Covid and inflation. The first has the risk of causing further lockdowns and economic pain over the winter months…

“Inflation is another factor, especially as energy prices have been soaring, which is now being felt in households across the continent. That results in an income squeeze as real wage growth suffers on the back of this despite a strong labour market.”

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Muted after Touching 21-Month High

The Pound Euro (GBP/EUR) exchange rate hit a 21-month high this morning at €1.1929, the pairing’s highest level since before the pandemic. GBP/EUR is holding above €1.19 despite retreating slightly at the time of writing.

Renewed Covid-19 fears across Europe have dented the Euro, while comments from Bank of England (BoE) Governor Andrew Bailey and reports on UK-EU talks over the Northern Ireland protocol have limited Sterling.

Pound (GBP) Subdued after BoE Bailey’s Comments

The Pound (GBP) is struggling this morning, although Sterling is holding near 21-month highs versus the Euro.

Comments from BoE Governor Andrew Bailey have limited GBP strength this morning by adding some uncertainty on the central bank’s position on hiking interest rates.

Bailey struck a cautious tone on when the central bank should raise interest rates in an interview with the Sunday Times.

According to the BoE’s governor, the Bank would raise interest rates if the economy develops as expected, but mixed UK data is causing a ‘febrile’ situation with ‘risks both ways’ in inflation forecasts.

Concerns that a tight job market could lead to inflation becoming entrenched in wage growth, and in turn keep inflation persistently high, is a key issue affecting the BoE’s policy stance.

Bailey outlined three crucial considerations for when to raise interest rates, saying:

“A, activity in the economy is slowing. B, the proximate cause of many of these inflation issues is on the supply side, and monetary policy isn’t going to solve these directly… And C, however the concern for us is what they classically call ‘second-round effects’, particularly in wage bargaining and the labour market… If the economy evolves in the way the forecasts and reports suggest, we’ll have to raise rates.”

Meanwhile, reports over the weekend point to stalling talks on the Northern Ireland protocol as European Commission vice-president Maroš Šefčovič called for an end to ‘political posturing’, adding:

“Sometimes I have the feeling that in our meetings I’m the only one who pushes for urgent solutions”.

Šefčovič comments came after the UK’s Brexit minister Lord Frost asked for an injection of ‘more urgency’ into talks.

Euro (EUR) Dented by Rising Covid-19 Threat

The Euro (EUR) is steadying this morning after coming under significant pressure from fears that the fourth wave of coronavirus sweeping Europe will disrupt economic recovery in the bloc going into winter.

Austria went back into lockdown today, and new restrictions in the Netherlands and Belgium prompted civil unrest over the weekend.

Meanwhile, Germany’s health minister Jens Spahn said a lockdown is possible and ‘we can’t rule anything out’.

The new restrictions come after World Health Organisation (WHO) regional director Dr Hans Kluge warned of 500,000 more deaths by March, saying:

“Covid-19 has become once again the number one cause of mortality in our region… we know what needs to be done”

With the threat of restrictions increasing the downside risks to growth in Europe, investors have become jittery.

Combined with European Central Bank (ECB) President Christine Lagarde warning that the bank ‘must not rush into a premature tightening’ of monetary policy and ‘conditions to raise rates are very unlikely to be satisfied next year’, the Euro has weakened.

Pound Euro Forecast: UK and Eurozone PMIs in Focus

While the Euro is regaining some of its recent losses today, the single currency may struggle to hold on for long.

Forecasts point to Eurozone consumer confidence data released later today falling to its lowest levels in six months.

Meanwhile, Eurozone manufacturing and services PMIs for November published tomorrow are expected to indicate activity is slowing in the private sector.

Expectations are for the UK’s corresponding PMI readings to have slowed in November, although forecasts suggest only a slight slowdown in business activity.

The Pound Euro exchange rate will also continue remaining sensitive to rising Covid-19 cases in Europe, headlines over talks on the Northern Ireland protocol, and comments from BoE and ECB policymakers.

Andrew Roberts

Contact Andrew Roberts