The GBP to EUR exchange rate reversed a two-day bout of selling to hold the key support level at 1.1500. The pound had stormed to nearly 1.17 after Boris Johnson confirmed his roadmap for reopening the economy.
GBPEUR will face economic data early in the week, before UK Chancellor Rishi Sunak delivers his second budget, which traders hope will add a further boost to the country’s emergence from lockdown.
Inflation and Bond Markets Test Central Banks
It was a busy week for the UK and European economies, with the UK seeing a loss of -114k jobs in its latest release, which pushed the unemployment rate to 5.1%. The level was the highest since 2016 and this is despite the furlough program. The Chancellor is certain to extend the furlough system but is holding onto the statement for budget plaudits.
In the Eurozone, inflation bounced back from the stubborn deflationary tone of last year with core inflation at 1.4%, versus 0.2% in the previous month. The figures are being pushed up by energy and food prices, while the delay of winter season clothing discounts is also distorting the figures.
Analysts have been happy to dismiss the rise in inflation numbers are transitory, but this week saw bond yields moving higher and rattling the markets. The US 10-yr treasury, which is seen as the benchmark for global risk markets, has been rising sharply this year. The rate started 2021 at 0.9% but closed the week above 1.4% as traders price in the expectation for an economic bounce. There are also fears about inflation as more and more stimulus measures flood the markets.
Traders are now looking to Monday for the ECB to publish its latest bond buying figures. The bank has said it will not tolerate higher rates and last week saw yields moving higher in the bloc, with an increase in the riskier nations, like Greece and Italy.
The Italian government will release its latest budget on Monday, and this will be the first with former ECB Chief Mario Draghi as the country’s Prime Minister. German inflation figures will also be released, and this will coincide with the ECB report to give traders an idea about the ECB’s ability to cap higher interest rates.
Wednesday will see the UK budget and pressure has been growing on Rishi Sunak from former Chancellors to ditch election promises. Former Prime Minister David Cameron has urged Sunak not to raise taxes in the budget, but it looks like he is planning to bump up corporate rates and raid wealthy pensioners in order to plug a £400 billion deficit.
The pound to euro exchange rate outlook will likely confirm this week whether the pair can hold the current levels above the April 2020 highs.
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