The Pound to Euro exchange rate rallied sharply this week, with the pairing striking its best levels since late November amidst suggestions no additional restrictions will be introduced in England.
Pound firms on Omicron optimism
The Pound initially stumbled this week, undermined by uncertainty over the UK’s Covid situation and speculation the government could introduce stricter restrictions to help combat the spread of the Omicron variant.
Sterling then quickly clawed back these losses on Tuesday after Boris Johnson announced it would not be imposing any new measures before Christmas.
While a weaker-than-expected UK GDP report limited the Pound’s upside potential in mid-week trade, GBP exchange rates then soared towards the end of the week after health secretary, Sajid Javid appeared to indicate the government will not impose any post-Christmas restrictions, following the release of a UK report suggesting Omicron is less likely to result in hospitalisation than previous variants.
Meanwhile, the Euro started the week on strong footing, with the single currency’s negative correlation with the US Dollar bolstering it as USD exchange rates weakened.
However, the Euro didn’t hold on these gains for long, as the Eurozone’s latest consumer confidence index reported consumer morale in the bloc slumped to a nine-month low in December.
EUR then extended these losses through the latter half of the week as more European countries announced plans to tighten Covid restrictions.
Brexit and Eurozone inflation to drive GBP/EUR in the new year?
Looking ahead, in the absence of any notable data and with trade likely to be exceptionally thin during the post-Christmas lull next week, we will turn our focus to the start of 2022.
The start of next year could see Brexit return to the spotlight as the UK finally implements its repeatedly delayed customs controls on goods entering the UK from the EU, with the potential disruption to trade likely to weigh on the Pound.
For EUR investors the focus in the first week of 2022 will be on the publication of the Eurozone’s latest consumer price index. Should December’s release report a slowing of inflation in the bloc then we could see the Euro fall, as this will validate the European Central Bank’s (ECB) stance that the current spike in prices is ‘transitory’.
In additional to this, both currencies are likely to remain sensitive to Covid developments, especially if more restrictions are introduced.
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