The Pound Euro (GBP/EUR) exchange rate hit a 22-month high last week as Bank of England (BoE) rate hike bets boosted the Pound (GBP). However, UK Omicron concerns chipped away at GBP/EUR’s gains.
What’s Been Happening: GBP/EUR Hits 22-Month High on BoE Rate Hike Bets
The Euro (EUR) was initially subdued last week as an upbeat market mood favoured the riskier Pound over the safe-haven single currency.
Policy divergence between the European Central Bank (ECB) and the BoE also weighed on EUR, despite strong German data. As a result, EUR/GBP slipped to a 22-month low.
Mixed Eurozone data then caused the Euro to waver, with GBP/EUR fluctuating between €1.195 and €1.199. But Friday saw the Euro end on a high after Eurozone inflation beat forecasts.
Meanwhile, the Pound rose early in the week as the UK government’s decision not to introduce further Covid restrictions cheered GBP investors.
BoE rate hike bets further boosted Sterling as the week went on. Traders priced in an 82.5% chance of another interest rate rise at the bank’s meeting next month.
However, the sheer number of UK Covid cases put pressure on the Pound. Covid-related staff shortages hammered health, public and emergency services. As a result, GBP/EUR wavered for the rest of the week, unable to hold its 22-month high.
Three Things to Watch Out for This Week
- ECB Speeches
After Eurozone inflation unexpectedly rose last week, hitting an all-time high of 5%, some investors may be hoping for a more hawkish tone from ECB President Christine Lagarde this week.
Omicron could continue to drive movement in both currencies. Will UK Covid cases keep falling, thereby boosting GBP? Or will Covid disruption continue to weigh on the Pound?
- UK GDP
Friday brings the UK’s latest GDP data. Economists expect the economy to have grown 0.4% in November, which may support Sterling.
Sparse data throughout much of the week could see Omicron news driving most movement. UK Covid cases have been falling recently; if they continue this trend, the Pound could strengthen.