The GBP to EUR exchange rate dropped last week as the pair failed to hold onto the new yearly highs. We said in last week’s review for the week that the pair, “may have seen an important high this week” and that was the case. The UK economy’s GDP that missed the BoE expectations also saw a lower inflation number this week and traders have taken profits on the pound. The GBP to EUR was trading around the 1.1670 level heading into the weekend.
Rate Expectations Cool, Virus Expectations Rise for GBP
The pound versus the euro rate has met another perfect storm at the 1.1800 level this month with profit-taking setting in. Despite a strong GDP number, the 4.84% figure was 0.2% less than the Bank of England’s forecast in their most recent rate meeting.
Traders also saw a UK inflation rate that dipped to the bank’s 2% target after recent surges and that has taken hopes for an early tightening of policy off the table. The UK saw a stronger employment number on Tuesday, but traders decided to focus on rates and fears of rising virus cases in the UK as Thursday logged over 36,000 cases and 100 fatalities linked to the virus.
This has led to government advisers making gloomy statements about the winter months and traders will be worried that they have the ear of the decision makers in Downing Street.
Euro Boosted by Employment Figures and GDP
The euro was boosted by a confirmation of the 2% GDP performance in the second quarter, with data also showing a boost in employment.
In a separate release the Eurostat statistics office said that employment had grown 0.5% in the April-June period compared to the previous quarter. The figures helped to provide some clarity on the strength of the European economy, and some will be hoping that the gap can be tightened for the pound versus the euro.
European Central Bank chief economist Philip Lane also gave an indication this week that Frankfurt is prepared to stomach higher inflation without raising interest rates.
In a blog post for the European Central Bank (ECB’s) website, Lane talked of the bank’s recent changes to its inflation target, where he said the ECB will only tighten policy by reducing stimulus or raising rates if there is strong evidence inflation will hit and stay at 2%
“Reaching the inflation target should be lasting and not just be the result of short-lived forces that lead to one-time increases in prices that are unlikely to lead to persistently higher year-over-year inflation,” he said.
The ECB is following other central banks by seeking to push the chances of rate hikes further out to 2023 as traders try to bring them forward into 2022.
The GBP to EUR rate is now likely to move lower and look for support, but another rise in virus cases is threatening to stall the recovery for now and that is causing a pullback.
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