The GBP/EUR exchange rate has faced some considerable pressure this week, following the announcement of new lockdown measures in England.
Pound tumbles amid lockdown blues
The Pound took a tumble in the first week of trade in 2021, as surging coronavirus cases throughout the country forced Boris Johnson to impose a strict new lockdown in England.
The move will undoubtedly result in a first quarter contraction in UK growth, which in turn could force the Bank of England (BoE) to ease its monetary policy further, a prospect which weighed heavily on Sterling sentiment throughout the week.
Applying further pressure were warnings from Johnson and his ministers that the lockdown could extend into March, depending on the success of the government’s ambitious vaccine rollout.
Meanwhile, despite the announcement of an extension to Germany’s lockdown, the Euro raced higher through the first half of this week due to its negative correlation with the US Dollar, which fell back as a result of upbeat market sentiment.
However, the Euro began to fumble some of its gains in the latter half of the week, undermined by both a rebound in USD exchange rates, as well as some lacklustre EUR data releases.
German budget in focus for EUR investors
Looking ahead to next week, a key catalyst in the Pound to Euro exchange rate is likely to be the publication of Germany’s budget for the coming year.
EUR investors will be keen to see how the German government will support the country’s economic recovery, from what looks set to be a double dip recession over the winter.
So far, we know that Germany has thrown out its ‘debt break’ as it plans to borrow €300bn across 2020 and 2021, but the key question will be how these funds will be spent, with EUR investors looking for the bulk of this to be spent on support for businesses and jobs.
Meanwhile, GBP investors will keep a close eye on UK coronavirus developments next week, with a continued surge in cases likely to limit any upside potential in Sterling.
Also influencing the Pound will be the publication of the UK’s latest GDP figures, with GBP exchange rates likely to face pressure as November’s monthly release looks set to report a slump in growth due to the lockdown in place at the time.