Pound Spikes on BoE Surprise Rate Hike, Omicron Fears Dominate FX Movement

GBP/EUR Exchange Rate: Pound Makes Fleeting Gains on BoE Surprise

The Pound Euro exchange rate spiked last week following the Bank of England’s (BoE) surprise decision to raise interest rates to 0.25% from 0.1%.

Investors had widely expected the central bank to leave rates unchanged amid soaring UK Covid-19 cases but the BoE cited signs of a stronger UK job market and soaring inflation as reason to hike rates.

However, the Pound’s gains were short-lived due to Omicron fears, with the UK services PMI for December unexpectedly slumping as consumer confidence dived and hit retail, hospitality, and travel sectors particularly hard.

With a lack of notable UK data releases until the New Year, UK GDP data has provided the Pound modest support this morning despite weaker-than-expected third quarter growth of 1.1% as revised 2020 UK growth estimates indicate the economy shrank 9.4% instead of 9.7%.

GBP/USD Exchange Rate: Pound Pressured by Covid Fears

The Pound US Dollar exchange rate fluctuated before trading in a narrower range this week as record high daily Covid-19 cases in the UK and the threat of tighter restrictions drove volatility in the Pound.

Sterling has come under pressure as the likelihood increases of stricter Covid measures in the UK, although Prime Minister Boris Johnson ruled out changes before Christmas.

The UK’s vaccination booster programme reaching 1 million people a day and the UK Treasury’s announcement of financial support for businesses hit by Omicron uncertainty helped offset GBP/USD losses.

Looking ahead, looming tighter restrictions in the UK look set to weigh on Sterling in the coming weeks, with a potential lockdown likely to disrupt UK economic activity.

USD/GBP Exchange Rate: US Dollar Fluctuates as Fed Meets Expectations

The US Dollar Pound exchange rate dipped following the Federal Reserve’s interest rate decision last week that met market expectations by announcing an accelerated tapering of its bond-buying programme and signalled rate hikes in 2022.

The ‘Greenback’ slipped after Fed chair Jerome Powell said raising rates would not happen while tapering is happening, suggesting rate hikes will be later in the year.

However, souring market sentiment due to Omicron variant fears and the threat of more lockdowns around the world have continued to provide safe-haven demand for the US Dollar.

Although trading conditions will likely be thin over Christmas, forecasts pointing to the US PCE price index indicating soaring inflation and durable goods order returning to growth will likely drive movement in USD this week.

EUR/USD Exchange Rate: Euro Trades in Wide Range after ECB Announcement

The Euro experienced significant swings over the last week, gaining despite the European Central Bank (ECB) confirming plans to double its asset purchase programme (APP) to offset the end of the pandemic emergency purchase programme (PEPP) following its interest rate decision.

EUR/USD then slumped going into the weekend after Germany’s Ifo business climate indicator for December indicated morale in the country fell for the sixth consecutive month.

The threat of stricter coronavirus restrictions in more countries throughout the bloc continued to limit EUR strength, but a weaker US Dollar and safe-haven demand allowed the Euro to move higher.

Looking ahead, with no notable data leading into the Christmas period, more European countries reintroducing Covid measures look set to weigh on EUR/USD, as Germany and Portugal become the latest to announce restrictions.

Andrew Roberts

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