GBP/EUR exchange rate slips as Omicron variant rattles markets

The Pound Euro exchange rate has dipped this week as fears over the impact of the Omicron coronavirus variant rocked markets and weakened the likelihood of the Bank of England (BoE) raising interest rates at its December policy meeting.

Pound Dips as BoE Rate Hike Bets Decline

The Pound weakened through this week as the emergence of the Omicron variant continued stoking volatility in markets.

The Omicron-driven market selloff and the UK government reintroducing some restrictions dented Sterling at the start of the week.

Fears that the Omicron variant could disrupt UK economic activity also led to investors lowering expectations for the BoE to raise interest rates at its December policy meeting, further weighing on the Pound.

Post-Brexit negotiations between the UK and EU also pressured Sterling, with talks on the Northern Ireland protocol at an impasse and the US becoming involved by maintain tariffs on UK steel.

Meanwhile, the Euro initially dipped at the start of the week as Omicron variants momentarily eased and limit the safe-haven appeal of the single currency.

Eurozone inflation jumping to a record high 4.9% in November, up from 4.1% in October also weighed on EUR sentiment.

However, the Euro soon strengthened as weakening expectations for a rate hike from the Federal Reserve and BoE seemed to narrow the perceived policy gap with the European Central Bank (ECB).

The single currency gave up some of its gains later in the week as German retail sales unexpectedly contracted for a third consecutive month and finalised Eurozone manufacturing and services PMI for November were downwardly revised.

Omicron Variant to Drive More Volatility?

Looking ahead, developments surrounding the Omicron coronavirus variant will likely continue driving GBP/EUR volatility, as more data about its spread becomes available.

With the BoE December rate decision drawing nearer, speculation whether the central bank could raise rates will also drive GBP exchange rates.

UK GDP data for October will likely drive additional Sterling movement, with growth expected to have slowed to 0.5%.

Meanwhile, high-impact data releases for Germany will likely be the focus for EUR investors next week.

Forecasts point to the ZEW economic sentiment index for December dipping as morale in the Eurozone’s powerhouse economy weakens amid surging Covid-19 cases, restrictions, and the Omicron variant.

German factory orders growth is forecast to have contracted -0.5% in October, and industrial production to have grown 0.5% after two months of decline, likely driving additional movement in the Euro.

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