Pound Euro (GBP/EUR) Holds, BoE, ECB and Omicron in Focus
The Pound Euro (GBP/EUR) exchange rate is edging higher this morning despite warnings from UK Prime Minister Boris Johnson of a ‘tidal wave’ of the Omicron coronavirus variant.
Sterling has been able to make gains versus the Euro so far today due to optimism over the UK’s vaccine booster programme and the single currency’s negative correlation with a rebounding US Dollar.
Ahead of high-impact UK data releases – starting with employment figures tomorrow – and the Bank of England (BoE) interest rate decision this week, GBP/EUR is trading at €1.1752 at the time of writing.
Pound (GBP) Limited by Omicron Fears
Concerns around the Omicron variant and tighter Covid restrictions in the UK are limiting the Pound (GBP) at the start of the week, although GBP is making modest gains against many of its peers.
The UK’s Covid alert was raised to level four over the weekend – the first time since May – due to fears over the high level of transmission of the Omicron coronavirus variant.
In a televised Downing Street announcement, Prime Minister Boris Johnson said: “No one should be in any doubt, there is a tidal wave of Omicron coming.”
Combined with the UK government proposing to introduce ‘Plan B’ measures, and speculation growing for even tighter restrictions soon, concerns over the impact on UK economic activity are weighing on GBP sentiment.
However, the Pound is receiving some support from the UK’s ambitious plan to roll out vaccination boosters.
The government wants to offer all eligible adults a booster by the end of this year at a rate of 1 million vaccinations per day, up from the current 530,000 each day at the moment.
Health secretary Sajid Javid has described the situation as a ‘race between the virus and the vaccine’.
Fears over the Omicron variant have fuelled uncertainty around expectations for the BoE’s interest rate decision later this week, which also continues to limit the Pound’s strength.
Euro (EUR) Pressured by Strong USD
The Euro (EUR) is under pressure this morning as broad strength in the US Dollar is weighing on the single currency due to the negative correlation in the pairing.
The perceived policy divergence between the European Central Bank (ECB) and other major central banks, particularly the Federal Reserve, is also weighing on EUR sentiment.
As speculation grows that the ECB will maintain its loose monetary policy stance by doubling its monthly bond purchases to €40 billion from April to make up for the end of the pandemic emergency purchase programme (PEPP), the Federal Reserve’s contrasting stance for expected tightening of policy is weakening the Euro.
Meanwhile, soaring Covid-19 cases and restrictions across Europe also continue to limit the single currency’s strength.
Pound Euro Forecast: BoE and ECB Rate Decisions in Focus
The BoE and ECB interest rate decisions look set to dominate headlines in the Pound Euro exchange rate this week.
After expectations for an interest rate hike from the BoE declined recently due to the risk posed by the Omicron variant to the UK’s economic recovery, the Pound may come under some pressure if the monetary policy committee (MPC) votes to leave rates unchanged.
However, with investors significantly reducing bets of the BoE raising interest rates, indications of tighter monetary policy in early 2022 in the Bank’s forward guidance may provide Sterling support.
At the same time, expectations for the ECB to double its Asset Purchase Programme (APP) to counter the effect of PEPP ending and recent comments from President Christine Lagarde and Vice President Luis de Guindos that inflation is transitory but may take longer to fall, may weigh on the Euro.
In a week of high-impact UK data releases GBP/EUR could experience additional volatility.
First up is UK employment data printed on Tuesday, with the unemployment rate expected to have dropped to 4.2% in the three months to October, down from 4.2% before.
As many BoE policymakers have commented on the jobs market and whether wage inflation becomes embedded as an important factor in deciding whether to raise rates, signs of improvement and slowing wage growth may boost GBP.
UK inflation, retail sales, and services and manufacturing PMIs through the week will act as key drivers in the Pound, while the Euro will remain sensitive to Eurozone PMIs, trade data, and German Ifo business morale data.