GBP/EUR Exchange Rate Continues Trending Higher on USD Upside
(Updated 17:00, 04/01/2022) The Pound Euro (GBP/EUR) exchange rate has continued to climb this afternoon as the US Dollar (USD) gained strength from an acute rebound in US bond yields. Euro (EUR) sentiment was subsequently dented as a result of the strong negative correlation between the two currencies, boosting GBP/EUR in turn.
Meanwhile, Bank of France head and ECB governing council member Francois Villeroy de Galhau said on Tuesday that inflation ‘is now close to its peak in our country and in the Euro Area’. He added that ‘supply difficulties and energy pressures should gradually subside over the course of the year’.
Euro investors have taken little notice of the upbeat comments and continue to trade with a bearish bias.
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Pound Euro Exchange Rate Climbs despite Upbeat German Data
The Pound Euro (GBP/EUR) exchange rate has peaked at a new 22-month high in spite of upbeat German data. Pound trading is supported by the UK’s finalised manufacturing PMI, which exceeded estimates in December.
At the time of writing, GBP/EUR is trading at €1.1950, up 0.2% from today’s opening levels.
Euro (EUR) Trades Indifferent to Employment and Retail Data
The Euro (EUR) is trading in a mixed range this morning despite positive data from Germany. Retail sales increased above October’s upwardly revised 0.5%, rather than decreasing as expected, while unemployment fell considerably more than forecast.
The Federal Statistical Office revealed that retail sales were buoyed by increased spending in supermarkets and department stores, while textiles, clothes and shoe sales fell. Preliminary estimates showed retail sales increased 0.6%-1.2% in January-November: a record growth despite coronavirus restrictions.
Meanwhile, the seasonally adjusted unemployment rate in Germany edged down further to 5.2% in December 2021, from 5.3% in the previous month and well below the 6.1% touched in the same month of 2020.
Yet the Euro faces headwinds from central bank policy divergence, as well as Covid-19 infection rates. European Central Bank (ECB) officials maintain their narrative that the latest spike in inflation is ‘transitory’ and are not expected to raise interest rates until late 2022 at the earliest.
In Spain, a new record in the national 14-day Covid infection rate was reported yesterday as the figure climbed to 2,295.8 per 100,000 people from 1,775.27 registered last Thursday. This news is also likely weighing upon the single currency.
Pound (GBP) Rises against Peers amid Risk-On Mood
The Pound (GBP) is ticking up against the majority of its peers this morning as a risk-on mood boosts Sterling demand. Also supporting GBP is the UK’s finalised manufacturing PMI, which revealed a smaller-than-expected fall in activity in December.
Data from Markit economics shows that initial estimates were revised slightly higher as production, new orders and employment in the manufacturing sector grew. Companies remained optimistic amid expectations of renewed global economic growth, planned investment and hopes for less disruption relating to Covid-19, Brexit and supply chain issues.
The Pound further benefits from the fact that UK Prime Minister Boris Johnson is suggesting there will be no further tightening of Covid measures soon. Johnson said on Monday that he would rely on existing Plan B measures — such as working from home, vaccine passports and facemasks — to combat rising infections.
GBP/EUR Exchange Rate Forecast: Worsening Covid Situation to Apply Downside?
Looking ahead, a lack of further UK or EU data today leaves the Pound Euro exchange rate to trade on external factors.
The most pressing of these is the worldwide Covid situation. If cases in the UK continue to rise exponentially, Sterling could come under pressure. Multiple NHS trusts have already declared ‘critical incidents’ amid soaring staff absences.
Alternatively, if US data impresses this afternoon, EUR may face headwinds due to the strong negative correlation between the Euro and US Dollar (USD).