The GBPEUR exchange rate sank -0.20% on Tuesday to trade at a five-week low versus the euro as virus variant cases surge in the UK. England lifted all coronavirus legal restrictions on Monday, in what was dubbed “Freedom Day”, but a surge in infections has put a dampener on the prospects for the reopening.
The GBP to EUR now trades at 1.1570 and the headline data for the week is the ECB rate meeting on Thursday.
Focus on ECB meeting this week
In a quiet week on the global data front, the focus will be on the July ECB meeting on Thursday.
“Following the ECB strategic review and the moving of the inflation target from ‘below, but close to 2%’ to ‘2%’, the new strategy can be interpreted as either a formalisation of what it has been doing over the last few years anyway or a step towards more dovishness, as 2% implies a more resolute effort,” ING bank said.
With the recent obsession over inflation, the ECB didn’t want to entertain tapering talk and thus it leaves the door open for further price rises after ECB Chief Christine Lagarde said that 2% “was not a ceiling”. The reopening in Europe was set to lead to further price increases but this is fading now as variant cases rise and restrictions are applied across Europe once more.
ING summed up the likelihood of a quiet ECB, saying:
“We don’t think the ECB will go as far as actually stepping up its bond purchases given the hawks at the ECB were already suggesting a reduction of the asset purchases at the June meeting. But given that the delta variant and new waves of Covid-19 in several eurozone countries cast enough uncertainty for the hawks to keep silent until the September meeting but stepping up bond purchases would clearly be a step too far.”
Pound hit by rising case numbers
The pound is being hit versus the euro because the reopening day was priced-in and now markets are wondering if the good news has expired. There is a growing sense amongst investors that the UK government will struggle to ride out the surging case numbers and will therefore move to fresh lockdowns.
Another headwind is that Britain’s Chief Scientific Adviser Patrick Vallance said on Monday that 60% of people being admitted to hospital with the latest cases had already had two doses of vaccine. This leads many to wonder if the UK reopening experiment will backfire.
Almost 100 deaths were attributed to the virus in what would be the country’s worst daily toll for four months. But there was a glimmer of hope with the weekly growth in infections beginning to flatten. More than 46,000 positive tests were recorded today, up by 27 per cent for the week. However, the seven-day average has fallen for the third day in a row.
The GBP versus the EUR rate had the 1.17 level in its sights but has now tumbled and the euro is seeking to build on the gains.