The GBP/EUR exchange rate has rocketed higher over the past week, courtesy of some hawkish comments from the Bank of England (BoE).
Pound surges as BoE dismisses negative rates
The Pound initially got off to a slow start this week, as some worrying UK coronavirus statistics stoked concerns that the government could tighten coronavirus restrictions even further.
But Sterling quickly found its feet again in the wake of comments from Bank of England (BoE) Governor Andrew Bailey, in which he downplayed speculation the bank could slash interest rates below zero, suggesting that ‘there are a lot of issues’ with negative rates.
Aiding the Pound’s rally through the second half of the week was optimism over the acceleration of the UK’s vaccination programme, as well as the UK’s latest monthly GDP release, where a –2.6% contraction in November beat market expectations for a larger slump, in light of the lockdown measures in place at the time.
The Euro, meanwhile has faced some headwinds this week, with some initial losses coming amidst a jump in the US Dollar and reports Germany’s current lockdown could be extended into April.
These losses where then reinforced later in the week by the release of the minutes from the European Central Bank’s (ECB) December policy meeting, in which members of the Governing Council expressed their concerns that the recent appreciation of the Euro could undermine the ECB’s efforts to bolster inflation.
ECB policy meeting in spotlight
Looking ahead to next week, the spotlight looks to be on the ECB’s first policy meeting of 2021. While the ECB is not expected to make any policy changes this week, the Euro could be pressured if policymakers continue to highlight the strength of EUR exchange rates as a point of concern.
Also of note to EUR investors next week will be the preliminary release of the Eurozone’s latest PMI figures, which could place additional pressure on EUR exchange rates at the end of the week amidst forecasts for another contraction in the bloc’s private sector.
Meanwhile, with the threat of stricter coronavirus restrictions looming, any upside in the Pound is looking quite limited next week.
Also set to influence GBP exchange rates will be the publication of the UK’s own flash PMI releases.
These are expected to report a sharper drop in economic activity than in the Eurozone In January due to the UK having gone into a strict lockdown at the start of the month, and as a result could drive some Sterling selling at the end of the week.