Pound Firm as Fed, ECB and BoE in Focus

GBP/EUR Exchange Rate: Pound Ticks Higher as BoE in Focus

The Pound Euro exchange rate has steadily climbed since dipping in midweek trade last week as the UK’s Covid-19 situation further weakened the chances of a rate hike from the Bank of England (BoE).

Despite UK GDP data showing growth nearly stalled at 0.1% in October, upbeat UK jobs data printed this week showed UK unemployment fell to 4.2% in the three months to October despite the end of the furlough scheme.

Combined with UK inflation soaring to a ten-year high of 5.1% in November, the Pound firmed as investors appeared to begin pricing in possible monetary policy tightening from the BoE in 2022.

With the BoE likely to leave interest rates unchanged at its monetary policy meeting on Thursday, investors will look to the central bank’s forward guidance for signals of a rate hike early next year, which could boost GBP/EUR.

GBP/USD Exchange Rate: Pound Dented by Covid Concerns

The Pound US Dollar exchange rate has fluctuated over the last week as the UK government announced tighter Covid-19 restrictions amid warnings of an Omicron variant ‘tidal wave’.

The move to ‘Plan B’ restrictions dented GBP/USD last week before the UK moving to level four (of five) at the weekend put more pressure on the Pound.

However, GBP/USD was able to recover some of its losses as the UK government’s plans for a massive vaccination booster programme of 1 million doses per day provided optimism that economic disruption could be limited.

Looking ahead, with uncertainty surrounding the potential severity of the new coronavirus variant, more evidence and fears over even stricter restrictions in the UK may stoke more volatility in GBP/USD.

USD/GBP Exchange Rate: US Dollar Fluctuates ahead of Fed

The US Dollar hit a one-year high against the Pound despite experiencing volatility over the last week.

Shifting market risk appetite partly driven by Omicron variant developments caused fluctuating demand for the safe haven currency. A risk-off mood gave way to improving market sentiment after Pfizer’s claims three doses of its vaccine is effective against Omicron, and a real-world study in South Africa showed protection against hospitalisation.

Meanwhile, despite US inflation soaring to a 40-year high of 6.8% bolstering expectations for tightening monetary policy from the Federal Reserve, the US Dollar came under pressure due to profit taking and investors bets of a higher CPI reading.

Turning to today’s session, the Federal Reserve’s December policy meeting may boost the US Dollar, with the Fed widely expected to announce an acceleration of tapering its bond-buying programme to pave the way for rate hikes in 2022.

EUR/USD Exchange Rate: Central Bank Divergent Policy Stances Weigh on Euro

After making some gains in the latter part of last week, the Euro has trended lower against the US Dollar.

Speculation the European Central Bank (ECB) will announce a doubling of its Asset Purchases Programme (APP) to €40 billion each month to offset the impact of the Pandemic Emergency Purchase Programme (PEPP) ending in March has weighed on EUR sentiment.

The ECB’s loose monetary policy stance in contrast to the Federal Reserve’s likely policy tightening has dented EUR/USD, with Thursday’s ECB monetary policy meeting expected to confirm the central bank policy divergence.

Data releases may also weaken the Euro in the coming week, as the Eurozone’s manufacturing and services PMIs are forecast to show a slowdown in activity, and business morale in Germany expected to decline for a sixth consecutive month in the Ifo business climate index.

Andrew Roberts

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