Pound Pressured by BoE Rate Hike Bets, USD underpinned by Fed

GBP/EUR Exchange Rate: Pound Fluctuates as Omicron Shifts BoE Rate Hike Bets

The Pound Euro exchange rate has fluctuated over the last week as fears over the Omicron variant disrupting economic activity weakened expectations for a December rate hike at the Bank of England’s (BoE) policy meeting.

BoE policymakers raised further doubts over the likelihood of a rise in interest rates after Michael Saunders said he sees benefit in waiting for more information on the impact of Omicron before deciding on hiking rates.

However, as Omicron concerns eased at the start of this week, GBP/EUR recovered with BoE Deputy Governor Ben Broadbent warning of inflation rising above 5% in spring 2022 and a tight labour market causing more persistent inflation.

Looking ahead, after Broadbent’s comments and easing Omicron fears refocused attention on when the BoE will likely raise rates, further indications on the central bank’s policy will drive movement in GBP.

GBP/USD Exchange Rate: Pound Dips ahead of UK GDP

The Pound US Dollar exchange rate has fallen over the last week as Northern Ireland protocol negotiations remain at an impasse, with UK Brexit Minister Lord Frost saying ‘significant’ gaps remain and triggering Article 16 is still a possibility.

Sterling further weakened after the US government appeared to intervene by maintaining tariffs on UK metals which analysts saw as a way to pressure the UK while the country threatens to activate Article 16.

Meanwhile, UK GDP data for October may further dent the Pound, with growth expected to have slowed to 0.4%, down from 0.6% in September.

However, UK data released early next week may allow the Pound make gains versus the US Dollar. Falling UK unemployment, rising wage growth, and another jump in inflation may provide evidence for the case that the BoE should raise interest rates.

USD/GBP Exchange Rate: US Dollar Supported by Fed

The US Dollar firmed over the last week as expectations for the Federal Reserve to accelerate tapering its bond-buying programme leading to rate hikes in 2022 underpinned support for the ‘Greenback’.

Disappointing non farm payrolls of 210,000, instead of the 550,000 increase forecast, had limited impact on USD/GBP as unemployment fell to 4.2% and the ISM services PMI jumped to a record high.

Market jitters stemming from Omicron variant fears also increased safe-haven demand for USD, although easing concerns over the new variant this week limited impact due to steady US Treasury yields providing support for the US Dollar.

Looking ahead, US inflation for November released on Friday will be the key focus for USD investors. After Fed chair Jerome Powell said it is time to ‘retire transitory’ to describe inflation, a jump in last month’s reading to 6.8% from 6.2% in October may provide a strong case to tight policy.

EUR/USD Exchange Rate: Easing Omicron Fears Weaken Euro Vs US Dollar

The Euro has slipped versus the US Dollar over the week amid Omicron-induced market volatility.

Safe-haven demand supported EUR sentiment last week as the European Central Bank’s (ECB) monetary policy expectations remained steady, unlike its peers, before easing Omicron concerns this week weighed on the Euro.

Data from Germany has also dented the Euro, as factory orders in October unexpectedly slumped -6.9% and the ZEW economic sentiment index for December dipped as Covid-19 sweeps the country.

More data from Germany may drive movement in EUR in the comings days, with improving trade data expected, while surging Covid-19 cases across the continent and the risk posed by restrictions may limited Euro strength.

Andrew Roberts

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