The pound to euro exchange rate rose more than one cent last Tuesday when Bank of England Governor Andrew Bailey said the bank would not be looking at zero or negative interest rates in the short-term. Instead, his tone was quite dismissive, suggesting that whilst zero or negative interest rates are an option, there are other options, more notably quantitative easing.
However, whilst the immediate threat of a rate cut has disappeared and provided the pound to euro exchange rate with support, there is still a feeling that the bank could look at an interest rate cut later this year, particularly given the economic difficulty the UK economy could face given the ongoing pandemic and exit from the EU. The threat of a rate cut has subsided for now but is not completely off the table. As such, investors will be cautious and monitor the UK’s economic recovery. Although, Bailey’s comments along with the Brexit trade deal, which was confirmed on Christmas Eve has provided some confidence, and Citi Bank, the world’s largest foreign exchange trader recently confirmed the return of long-term investors once again seeking UK assets.
The pound is arguably the most sensitive of the G10 currencies and will remain open to market risk appetite. Whilst relatively basic and only covering goods, the Brexit trade deal has provided investors with some reassurance. However, the UK economy is 80 percent services driven and there has been no agreement reached here. There is ongoing talk about equivalence although the EU’s current demands are excessive, which makes an agreement here unlikely in the short-term and the more time passes, the less likely it is that the UK and EU will reach agreement.
UK Vaccine Programme to Drive Pound to Euro Exchange Rate
The UK government has been heavily criticised for its response to the Covid pandemic but the roll out of the vaccine in the UK has been one of the most successful in the world so far. The UK has been quick out of the blocks with the acquisition and distribution of Covid vaccines, aiming to inoculate the most vulnerable by mid-February. If Boris Johnson and his government can meet their vaccination goals, this sets the pathway for the UK to lower the severity of the lockdown and start returning the country to some sense of normality. It is unlikely, the lockdown would be eased in full, but we would likely see a return to tiers with regions with the lowest infection numbers and most vaccinations given the most freedom.
By contrast, the EU has struggled to implement its vaccination programme. The response has been slow, and uncoordinated. The EU wasted time deliberating over which vaccines to back and required sign off from all countries before pursuing a plan although much of the blame can be laid at the door of state governments and health departments that have failed to grasp the magnitude of the task and prepare accordingly. This lack of preparation is likely to weigh on the Eurozone as lockdowns remain in place, hitting the economy. This of course, impacts the euro as investors weigh up the prospect of an economic rebound, penciling in a greater recovery time.
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