Pound Euro Exchange Rate Zigzags Lower amid Weaker USD

Pound Euro (GBP/EUR) Exchange Rate Slips as Euro Enjoys USD Downside

(Updated 15:45, 7/1/22) The Pound Euro (GBP/EUR) exchange rate has sunk this afternoon, after wavering through the first half of the day. The movement came from an upside in the Euro (EUR) thanks to its negative correlation with a weakening US Dollar (USD).

The downside in USD came as the US non-farm payrolls report disappointed investors, printing at just 199,000, versus the 400,000 expected. This weakness in the ‘Greenback’ gave the single currency room to rise.

Meanwhile, the Pound (GBP) continued to face pressure from surging UK Covid cases. Northamptonshire has declared a system-wide major incident as health, public and emergency services struggle with rising demand and severe staff shortages. Staffordshire also declared a major incident yesterday due to the same pressures.

GBP investors seem concerned about the UK’s worsening situation. In addition to the potential implications for public health and safety, further disruption could dent the UK economy and perhaps prompt further Covid measures from the government.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Down on Eurozone Data and UK Covid Fears 

The Pound Euro (GBP/EUR) exchange rate initially lost ground this morning as Omicron continues to worry GBP investors. 

The upside in the single currency came despite some poor German data. However, stronger Eurozone data followed and may drive further gains. 

Pound (GBP) Softens as Covid Pressures Continue 

The Pound (GBP) slipped against the Euro (EUR) this morning as the rapid spread of the Omicron variant continues to put pressure on the NHS. 

The Ministry of Defence (MoD) has deployed military personnel to London to help cover staff absences. With Covid infection rates so high, many NHS workers are either off sick or isolating to avoid spreading the virus. Now 40 defence medics and 160 general duty personnel from the MoD will help to ease the pressure. 

Patricia Marquis, the Royal College of Nursing’s director for England, said the move shows that the government now recognises the ‘staffing crisis’ in the NHS. She said: 

‘The prime minister and others can no longer be dismissive of questions about the ability of NHS staff to deliver safe care’. 

The news could have wider implications for society. If pressures on the NHS keep mounting, the government may have to consider tougher restrictions. Meanwhile, staff absences in other sections of the economy could stifle the recovery. 

Euro (EUR) Gains despite Poor German Data 

The Euro, on the other hand, has gained ground so far today. The upside comes despite some poor German data. 

Industrial production in Europe’s largest economy unexpectedly contracted in November, printing at -0.2% rather than 1%. 

In addition, Germany’s balance of trade figures for November 2021 also missed forecasts. The country’s trade surplus declined from €12.7bn to €12bn, though economists had expected it to rise to €14.2bn. This was also lower than the €16.8bn trade surplus in November 2020. 

However, EUR investors seemed to shrug off this poor data as they awaited the Eurozone’s CPI result. According to the flash estimate, inflation in the Euro area rose to 5% in December from 4.9% in November. The consensus estimate was that it would drop to 4.7%. 

This result potentially challenges the European Central Bank’s (ECB) narrative that inflationary pressures will soon begin to ease, with some EUR investors perhaps hoping that the bank will adopt a more hawkish stance. 

Additionally, Eurozone retail sales beat forecasts for November. Sales rose by 1% rather than contracting by 0.5%, as economists had expected. 

Pound Euro Exchange Rate Forecast: EUR to Climb on CPI? 

At the time of writing, the Eurozone CPI has only just been released. If investors hold out hope for a more hawkish ECB then the single currency could climb. However, the ECB has so far been steadfast in its commitment to accommodative monetary policy, so there is a chance that investors will be worried by the rise in inflation. 

Strong US employment data later this afternoon could boost the US Dollar (USD), which would likely weigh on the Euro due to the currencies’ negative correlation. 

As for the Pound, Omicron news could continue to influence GBP. Will more negative headlines dent Sterling? 

Samuel Birnie

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