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Pound Euro Exchange Rate Falls as Investors Eye ECB for Early Rate Hike

January 6, 2022 - Written by John Cameron

Pound Euro (GBP/EUR) Exchange Rate Dips Amid Risk-Off Market Mood

The Pound Euro Exchange Rate (GBP/EUR) has fallen this morning, after the release of the US Federal Reserve’s meeting minutes on Wednesday evening sparked a risk-off trading mood. Despite this the currency pair remains around its highest level since February 2020.

At time of writing the GBP/EUR exchange rate is at around €1.1950, which is down roughly -0.3% from this morning’s opening figures.

Euro (EUR) Boosted by Rising Bond Yields and Bets on ECB Rate Hike

The Euro has been boosted today by a risk-off market attitude, as well rising Euro bond yields and higher expectations of an interest rate rise by the European Central Bank (ECB).

The publishing of the US Federal Reserve’s latest policy meeting minutes on Wednesday is thought to be the main driver of today’s trading mood. The minutes hinted that the Fed may raise interest rates as soon as March 2022, prompting a flurry of speculative bets on the Euro. Markets have already priced in two possible rate rises by the ECB.

The Euro may have also seen a boost after promising figures indicated a rebound in German industrial orders in November. The trading bloc’s largest economy saw a 3.7% rise in goods orders with higher demand from abroad driving the rise, although German ministers were quick to point out that supply chain issues are expected to continue well into the first half of 2022.

News that the French parliament has approved President Emmanuel Macron’s plans for a vaccine pass may also help increase confidence in the Euro. Despite ‘coarse’ language from Macron in the weeks leading up to the vote regarding unvaccinated individuals, French policymakers are hoping the pass will help curb the spread of the Omicron variant.

Pound (GBP) Drops amid Lowest Services Growth Since February 2020

The Pound (GBP) has fallen against it’s safer rival currencies today as a risk-off market mood drives investors to the Euro and US Dollar. Ongoing issues surrounding the steep rise in Covid-19 cases in the UK may also have contributed to Sterling’s dip.

The UK reported record levels of Covid-19 prevalence for the last week of 2021, with one in 15 people in England infected with the virus. The surge in cases has caused mass staff shortages across the healthcare, retail, hospitality, and emergency sectors with supplies of lateral flow tests remaining unreliable.

Sterling could be pushed down further today following news that the UK’s service sector grew at its slowest pace since the country’s February 2020 lockdown. December’s PMI for the services sector fell to 53.6 which, whilst above forecasts, was well below November’s figure of 58.5. It’s thought that consumer fears over the Omicron variant and government guidance encouraging limited mixing contributed to the fall. Analysts are concerned that the rise in business costs and cost of living could place a big squeeze on consumer demand heading in to 2022.

Tim Moore, economics at HIS Markit, had the following to say on the figures:

‘Mass cancellations of bookings in response to the Omicron variant led to a slump in consumer spending on travel, leisure and entertainment. Survey respondents also noted that renewed pandemic restrictions had slowed the recovery in business services.’

GBP/EUR Exchange Rate Forecast: Will High Eurozone Inflation Place Pressure on ECB?

Looking ahead to the rest of the week, the UK’s December PMI for the construction sector could prompt some downward movement in the Pound as forecasts predict a slight slowdown. The Pound’s fortunes are also likely to affected by the rise in Covid-19 cases and ongoing testing issues.

Inflation data for Germany later on Thursday could prompt further speculative bets on the Euro, with the rate forecast to stay above 5%. Friday’s inflation figures for the Eurozone are also forecast to stay close to 5%, although a forecast fall in the trading bloc’s retail sales for November could push temper any gains for the Euro.

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