Pound Hits 22-Month High vs Euro, US Dollar Pressured by Risk-On Trade

GBP/EUR Exchange Rate: Pound Surges as UK Covid Rules Unchanged

The Pound Euro exchange rate climbed through thin Christmas trade to hit a 22-month high at the start of 2022.

The UK’s government decision to not tighten Covid measures in England boosted Sterling by fuelling optimism that the UK may avoid significant economic disruption from the surge in Omicron cases.

Optimism in the UK’s economic outlook received further support from the country’s impressive booster vaccine programme meeting the government’s target of being offered to all eligible adults.

After Prime Minister Boris Johnson said England can ‘ride out’ the current Covid-19 surge and there is a ‘good chance’ restrictions will not tighten, GBP/EUR may hold at 22-month highs on hopes UK economic growth stays on track.

GBP/USD Exchange Rate: Pound Buoyed by Omicron Reports

The Pound US Dollar exchange rate strengthened sharply through the festive period in upbeat market trade which was fuelled by reports that Omicron causes milder illness than the Delta variant of coronavirus.

However, Pound US Dollar exchange rate gains hit headwinds over concerns of the impact of soaring UK Covid-19 cases to record highs, rising hospitalisations, and businesses suffering due to more staff having to self-isolate.

Post-Brexit UK import rules coming into effect on January 1st that threaten to disrupt trade into the UK from EU suppliers also limited GBP/USD gains.

Looking ahead, the UK’s finalised services PMI released on Thursday may weigh on Sterling sentiment. Forecasts point to confirmation of a sharp slowdown in the sector, although any downward revision resulting from Omicron jitters on hospitality and retail over Christmas may further dent the Pound.

USD/GBP Exchange Rate: US Dollar Pressured by Risk-On Mood

The US Dollar Pound exchange rate trended lower over the last couple of weeks as a risk-on market mood dented demand for the safe-haven ‘Greenback’.

Reports from real-world data studies in the UK and South Africa that suggest Omicron causes less severe illness than other coronavirus variants boosted market risk appetite, in turn weighing on the US Dollar.

Economic data releases also drove movement in USD, with higher-than-expected PCE price index and durable goods orders at 5.7% and 2.5%, respectively, providing support before Christmas. But a below forecast ISM manufacturing PMI weakened USD sentiment.

More high-impact data releases this week may help USD/GBP regain recent losses. USD investors will look to the Federal Open Market Committee (FOMC) meeting minutes for hints on how aggressively the Fed will hike rates in 2022, and the ISM non-manufacturing PMI and payrolls data for December for insight into the US economy’s performance.

EUR/USD Exchange Rate: Euro Volatile ahead of Inflation Data

The Euro fluctuated against the US Dollar coming into the new year as the negative correlation in the pairing allowed EUR to make some fleeting gains against weaker USD, before the single currency fell back this week.

However, record high coronavirus infections and stricter measures in many European countries weighed on EUR sentiment over Christmas.

Germany, France, Portugal and other European countries have reintroduced significantly tighter Covid restrictions, while Covid-19 daily cases in France topped 270,000 on Tuesday.

High-impact EUR data releases in the coming may provide the Euro with support. Eurozone inflation for December will likely be the focus for investors as forecasts point to a slowdown to 4.7% from 4.9%, which would support the European Central Bank’s (ECB) view that inflation will begin to come down through 2022.

Andrew Roberts

Contact Andrew Roberts


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