The GBP to EUR rate was flat in early Friday trading after a sixth-consecutive day of gains saw sterling testing the November highs versus the euro. Data out today from the Office for National Statistics (ONS) showed that the UK economy fell 2.6% in November due to the current government lockdowns.
higher by 0.10% on Thursday with the pair looking to capitalize on five-straight days of price gains. The European economy awaits the release of full year Gross Domestic Product (GDP) from Germany today, while tomorrow sees the latest UK GDP update.
GBPEUR was trading at 1.1250 and next week will see inflation figures for the Eurozone and the UK, which could determine the next path for the currencies.
<h2>Lockdowns Strike Another Blow to the UK Economy</h2>
Today’s GDP release from the ONS showed a 2.6% drop in the UK economy, which is now 8.5% below the pre-virus peak. The important services sector saw a 3.4% fall, leaving the sector 9.9% below the peak and November’s drop was the third largest fall in services since records began in 1997.
Chancellor Rishi Sunak commented on the numbers, saying:
“It’s clear things will get harder before they get better and today’s figures highlight the scale of the challenge we face.
The worst of the lockdowns came after late November so we can expect further economic damage in the weeks ahead. Despite this, the pound is seeing strength against the euro due to a faster rollout of vaccines.
<h2>ECB Minutes Show Concern Over Euro Strength</h2>
The ECB released the latest minutes from its December meeting yesterday and the bank showed concern over the strong euro.
A balancing act was seen between the short-term negative news of the virus outbreak versus the medium-term availability of vaccine. The key point was a statement on the price of the euro with the document saying,
“it was pointed out that the nominal effective exchange rate currently stood at an all-time high and that the recent appreciation could contribute significantly to the subdued inflation outlook”.
Members of the ECB were critical of the euro’s strength in the second half of the year with a sell-off in the US Dollar and it was weighing on inflation rates. The Eurozone was seeing inflation of only 0.2% despite the hundreds of billions in stimulus. The minutes added that, “concerns were voiced over risks related to developments in the exchange rate that might have negative consequences for the inflation outlook”.
Some members of the ECB talked of some sort of intervention to tackle the higher euro and this would be a threat to the currency in 2021.
The UK’s vaccine approach could see the country build an advantage on the EU in the race to reopen the economies. There is also potential for the EU to move toward negative interest rates and further stimulus before the UK. These factors will drive the GBPEUR outlook over the first half of 2021.