The Pound to Euro exchange rate traded in a wide range this week after the UK government implemented stricter Covid restrictions.
Sterling undermined by new Covid restrictions
The Pound initially got off to a strong start against the Euro this week, as the single currency was undermined by some disappointing German data, with factory orders plummeting in October and economic sentiment continuing to deteriorate in December.
However, Sterling was unable to sustain these gains for long, with GBP exchange rates plummeting in mid-week trade, following the announcement that the UK government would be implementing its ‘Plan B’ Covid measures, in an effort to combat the spread of the Omicron variant.
The measures include new working from home guidance as well as extending mask requirements to more venues. Analysts suggest the new restrictions are likely to limit economic growth and make it very unlikely that the Bank of England (BoE) will go ahead with an interest rate hike this month.
The GBP/EUR exchange rate then rallied again in the latter half of the week, with the pairing able to pare most of its losses, following reports that the European Central Bank (ECB) is discussing plans to increase its Asset Purchases Programme (APP) at its December policy meeting.
ECB and BoE rate decisions in the spotlight
Turning to next week’s session, it’s clear that the ECB’s and BoE final interest rate decisions of the year will act as the primary catalysts for the Pound to Euro exchange rate.
Should reports the ECB will temporarily extend its asset purchases prove to be correct, then we are likely to see the Euro face some notable headwinds through the session. Further pressure may come from the Eurozone’s latest PMI figures which are expected to report a showing of economic activity in the bloc this month.
Meanwhile, with the BoE no longer expected to hike interest rates this month, the key focus for GBP investors will be on the bank’s forward guidance.
While the BoE may adopt a more cautious tone in light of the UK’s new restrictions, the publication of some strong employment and inflation figures earlier in the week could see the bank signal a rate hike could come in early 2022, bolstering the Pound.
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