Pound Hits 21-Month High Vs Euro, USD Strengthens

GBP/EUR Exchange Rate: Pound Boosted by BoE Rate Hike Expectations

While fluctuating over the last week, the Pound Euro exchange rate hit a 21-month high and holds solid gains made at the start of last week’s session.

Increasing expectations for a rate hike from the Bank of England (BoE) at its December policy meeting boosted Sterling after inflation soared to a 10-year high of 4.2% in October, appearing to put pressure on the central bank to act.

However, the Pound’s rally faded as uncertainty lingers whether the Bank will raise rates after wrong footing markets last month, and some BoE policymakers reiterated the view inflation is transitory, the UK job market may need more time, and UK growth is slowing.

As the BoE December policy meeting and interest rate decision draws nearer, speculation fuelled by comments from policymakers and investor bets on a rate hike will likely continue driving GBP movement.

GBP/USD Exchange Rate: Pound Weakens as Brexit Talks in Deadlock

The Pound US Dollar exchange rate has trended lower through the week as Brexit headwinds and mixed UK PMI data dented GBP/USD.

Talks between the UK and EU over the Northern Ireland protocol appear to remain in deadlock, with European Commission vice-president Maroš Šefčovič saying talks will probably run into next year, leaving possibility of the UK government activating Article 16 of the agreement.

Meanwhile, UK PMI data revealed businesses are suffering from input cost inflation rising to record highs, although the service and manufacturing sector readings both bettered forecasts to indicate growth.

In the absence of significant UK data releases over the coming week, UK-EU post-Brexit negotiations and the fourth wave of Covid-19 sweeping Europe will likely cause movement in the Pound.

USD/GBP Exchange Rate: Safe-Haven Demand Buoys US Dollar

The US Dollar has made significant gains since the end of last week after souring market sentiment caused by the Covid-19 surge and restrictions in Europe, and collapse of the Turkish Lira, increased demand for the safe-haven currency.

Rate hike expectations from the Federal Reserve in 2022 supported by current chair Jerome Powell’s nomination for a second term have also bolstered the US Dollar.

Ahead of markets closing for Thanksgiving tomorrow, a slew of high-impact data may support the USD/GBP exchange rate.

A return to modest growth of durable goods orders, increased expectations for a rise in interest rates in 2022 prompted by a forecasted acceleration in the PCE price index to 4.9%, and the Federal Open Market Committee (FOMC) minutes could bolster the US Dollar.

EUR/USD Exchange Rate: Euro Tumbles to 16-Month Low

The Euro fell to a 16-month low against the US Dollar as the perceived divergence in monetary policy between the European Central Bank (ECB) and Federal Reserve pushed EUR/USD lower.

While bets increase for more monetary policy tightening from the Fed in 2022, ECB President Christine Lagarde said the ‘conditions to raise rates are very unlikely to be satisfied next year’.  

Soaring Covid-19 infections across Europe have added pressure to EUR exchange rates, with Austria announcing a lockdown, restrictions in the Netherlands and Belgium, and calls for renewed restrictions in Germany.

Looking ahead, a fifth consecutive month of decline in the German Ifo business sentiment index is weighing on the single currency today, while Eurozone inflation published next Wednesday also looks set to dent on EUR sentiment.

Andrew Roberts

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