The GBPEUR exchange rate slipped below 1.16 over the last two days after the UK released employment and inflation numbers. Sterling is still higher on the week, but traders are hesitant to push it higher from here. Today will see the monthly European Central Bank interest rate meeting and the market will wait to see how that plays out.
The GBP v EUR is trading at 1.1580 in early trading on Thursday.
Germany votes on ‘emergency brake’ law
German MEPs are voting on an ‘emergency brake’ law which would create a nationwide lockdown system. Protesters gathered in their thousands to oppose the law and were met by a large police presence outside the country’s parliament in Berlin.
Germany’s 16 states have been handling their own restrictions until now and there has been pushback on further lockdowns recently, which led to an embarrassing u-turn for Chancellor Merkel.
Ms Merkel has now proposed the nationwide federal law which would be used if a region sees 100 new cases per 100,000 residents. The law would apply evening curfews, limited gatherings and closure of businesses and venues. Protestors are angry that governments are trying to make their ‘temporary lockdowns’ a permanent fixture.
Boris Johnson is among those predicting a third wave of the virus when the country reopens. With the vulnerable age groups already vaccinated, some will worry that governments are enjoying their power grab and are looking to keep it going.
This is a risk for the GBP to EUR as the UK will get a reopening boost in the second quarter, but it could be that the European economy doesn’t open. Cases were surging in Germany amid a slow vaccination campaign and if politicians vote their emergency brake into law, the EU may stay in lockdowns ahead of the autumn cold weather when viruses are more prevalent.
ECB interest rate expectations
The ECB will meet on Thursday to announce their latest interest rate and monetary policy measures. It’s unlikely that the bank will make any move on interest rates which have been stuck at zero, but traders are interested in a potential rate cut down the line. The bond-buying program has also remained at steady levels after the ECB increased it around the time that bond yields were spiking higher.
The economic shocks have subsided for now, and the central bank will get a pass to take no action, or to make any big projections, but markets may be complacent about the reopening path in Europe.
Markets are relaxed about ECB rate expectations after they were pricing in a 10-bps cut in July 2021 back in December. The expectations have changed with markets predicting only a 15% chance of a cut in borrowing costs by December 2021.
The GBPEUR has support and resistance between the 1.15 – 1.16 levels, but we are unlikely to see these levels tested on the ECB statement, unless they hinted at an increase in stimulus.