Pound Euro Exchange Rate Pushes Key Level amid UK Covid Optimism

Pound Euro (GBP/EUR) Exchange Rate Holds near €1.20

The Pound Euro (GBP/EUR) exchange rate is strengthening at the start of the week, hovering just below €1.20 and trading at €1.1990 at the time of writing.

Hopes that the UK is beginning to move out of the pandemic and is managing the current wave of Covid-19 is supporting GBP sentiment.

Pound (GBP) Bolstered by Ongoing UK Optimism

The Pound (GBP) is firming so far today as the UK continues to benefit from optimism that the country is avoiding tighter restrictions and managing to maintain economic momentum.

Comments from Education Secretary Nadhim Zahawi, the former Vaccine Deployment Secretary, supported the optimistic mood after he said the UK is on the road ‘from pandemic to endemic’.

Cabinet minister Michael Gove echoed this view on Monday, saying the UK is ‘getting ready to live with Covid’.

He added:

“I think it’s striking to note that in the United Kingdom overall, particularly in England, we have one of the most open regimes, one of the essentially… one of the most liberal approaches of any country in Europe.

“However, we also need to balance that with a determination to ensure that we are not overwhelming the NHS.”

However, Sterling’s gains have been limited by the prospect of post-Brexit trade talks breaking down between the UK and EU.

Writing in the Sunday Telegraph on Sunday, Foreign Secretary and the UK Lead Negotiator Liz Truss said she is ‘willing’ to activate Article 16 of the Northern Ireland protocol.

Triggering Article 16 would override parts of the trade agreement which some analysts believe could lead to trade disruption between the UK and EU.

Truss’ comments have heightened tensions with the EU, with the EU’s ambassador to the UK, Joao Vale de Almeida, saying:

“We’ve heard this before from the government, so we’re not surprised. We are not too impressed.

“We still believe it’s not very helpful that we keep agitating the issue of Article 16.”

Euro (EUR) Struggles as US Dollar Recovers

The Euro (EUR) is coming under pressure at the start of this week’s session as the US Dollar’s (USD) recovery weighs on the single currency due to the negative correlation in the pairing.

Europe’s looming energy crisis also continues to weigh on EUR sentiment as the German government begins to look at measures to help consumers hit by surging household bills.

Rising energy prices across the continent could also mean the European Central Bank (ECB) may need to act if the surging prices become more persistent, according to the central bank’s board member Isabel Schnabel.

Commenting on rising prices, carbon taxes, and the transition to greener energy, Schnabel said:

“The green transition poses upside risks to medium-term inflation.

“Rising energy prices may require a departure from a ‘looking through’ policy.”

Meanwhile, the Eurozone’s unemployment rate for November met expectations and fell to 7.2%, down from 7.3%, dropping to its lowest level since March 2020.

However, the data appears to have had little impact on EUR movement as markets widely expected the 0.1% improvement.

Pound Euro Forecast: GBP/EUR to Break Above €1.20?

The Pound Euro exchange rate looks to continue testing €1.20 in the coming days as Sterling remains supported by cautious optimism that the UK’s healthcare services can manage the latest coronavirus wave.

In the absence of notable UK data releases until the end of the week, further signs of developments in the UK-EU post-Brexit trade talks on the Northern Ireland protocol may also stoke volatility in GBP.

Lead UK negotiator Liz Truss and EU counterpart Maroš Šefčovič are due to meet this week, and investors will look for signs of progress in the negotiations.

Meanwhile, Eurozone industrial production data released on Wednesday may dent EUR sentiment as forecasts point to growth slowing to 0.5% in November, down from 1.1%.

Changes in the Covid-19 situation in countries across Europe will also continue to drive the Euro’s movement, with restrictions on place in many countries and cases still soaring.

Andrew Roberts

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