GBP/EUR Exchange Rate: Pound Supported by UK Optimism and BoE Rate Hike Bets
The Pound Euro exchange rate continued to hold just below a key barrier of resistance over the last week, before touching a 23-month high again on Wednesday.
Optimism in the UK’s recovery has underpinned GBP after UK GDP for November revealed the UK economy grew 0.7% above pre-pandemic levels.
Signs of economic strength have continued increasing expectations for a rate hike from the Bank of England (BoE) at its February policy meeting, which has also provided support for the Pound.
With a rise in interest rates heavily priced in for February, bets on how aggressively the BoE will hike rates through 2022, easing UK Covid-19 measures, and ongoing political uncertainty over the Downing Street parties furore will likely be key drivers in GBP this week.
GBP/USD Exchange Rate: Pound Weakens on Cost of Living Concerns
After firming at the end of last week, the Pound US Dollar exchange rate has slipped so far through this week’s session.
Fears of a cost of living crisis heightened after UK job market data revealed wage growth fell behind inflation meaning a pay decline in real terms, despite the unemployment rate unexpectedly dropping to 4.1%.
Inflation soaring more than forecast to a 30-year high of 5.4% and set to peak in spring intensified concerns over the impact on consumer spending leading to weaker economic growth at the end of last year and through 2022.
Looking ahead, forecasts pointing to a contraction of -0.6% in UK retail sales in December may fuel more economic growth worries in the fourth quarter of 2021, although a stabilising services PMI for January may help ease some concerns.
USD/GBP Exchange Rate: US Dollar Boosted by Surging Treasury Yields
The US Dollar Pound exchange rate recovered from a dip last week and has climbed sharply since US markets reopened on Tuesday after closing for a national holiday.
Inflation hitting a 40-year high of 7% in December triggered an aggressive USD selloff, with investors appearing to have priced in a higher figure driving a more upbeat market mood that weighed on safe-haven demand for the US Dollar.
However, USD exchange rates have surged this week in line with US Treasury yields reaching a two-year high on increasing bets that the Federal Reserve will hike interest rates four times in 2022 starting in March.
With Federal Reserve policymakers entering the blackout period ahead of the bank’s January meeting, bets on rate hikes may ease slightly and shifting market risk appetite may be the main driver in the US Dollar.
EUR/USD Exchange Rate: Euro Drops on ECB and Fed Policy Divergence
The Euro has fallen against the surging US Dollar over the last week as the European Central Bank’s (ECB) perceived policy divergence from the Federal Reserve continues to dent EUR sentiment.
Comments from ECB President Christine Lagarde that reiterated the bank’s stance that inflation will ease soon reinforced the policy gap, with the Fed expected to aggressively tighten monetary policy.
German GDP growth data released on Friday also failed to provide the Euro support as the Eurozone’s powerhouse economy remains smaller than before the pandemic. Eurozone trade data showing the first trade deficit since 2014 also weighed on EUR.
Meanwhile, much better-than-expected German ZEW economic sentiment surveys released on Tuesday also failed to strengthen EUR, as the single currency’s negative correlation with the US Dollar offset any support.
The ECB’s policy divergence from major central bank’s may continue to weigh on the Euro, while Eurozone services and manufacturing PMIs, and German Ifo business climate may stoke additional volatility.