The GBP to EUR exchange rate surged this week after strong economic data pointed to an interest rate hike for the UK in December. Stronger unemployment and inflation data will put pressure on the Bank of England to take action and policymakers have been vocal this week. Europe is also seeing inflation, but a larger threat is the latest coronavirus outlook with governments moving towards lockdowns.
The GBP EUR entered the weekend near 1.1700 level but surged to new yearly highs near 1.1940.
Bank of England under pressure to hike rates after data
The Bank of England is now under pressure to take action after a surge in inflation to 4.2%.
Analysts had expected a reading of 3.9% but energy price hikes had an effect on the October numbers. The latest figures are the highest since December 2011 but may have further to run.
The Bank of England Governor Andrew Bailey talked about his discomfort with the situation, saying:
“I’m very uneasy about the inflation situation – I want to be very clear on that. It is not of course where we wanted to be, to have inflation above target.”
However, Michael Saunders said there was no risk of a wage-price spiral like the 1970s because households have less money to spend, ironically due to inflation.
Another policymaker, Catherine Mann, who joined the BoE’s Monetary Policy Committee in September, said she believed the public had faith in the central bank.
“We feel confident that they believe that the Bank of England can and will – those are important ingredients right, can and will – undertake the appropriate policy response to bring inflation back to 2%,” Mann said.
Finally, Monday saw comments from the BoE’s Haskel who hinted that the labor market played a part in the recent rate decision. He said the economy was “firing on two cylinders” and it’s “too early to declare success” in getting those on furlough back to work.
A day later saw the latest UK employment figures with a better-than-expected 4.4% unemployment rate and a record jump in unemployed onto the payrolls after furlough’s end.
The comments and the data are surely signaling a December move from the Bank of England.
European economies moving towards lockdowns on virus surge
The European economies are also seeing a rise in inflation with numbers similar to the UK, but Christine Lagarde at the ECB is adamant that there will be no rate action in 2022.
The bigger problem for the euro is a rush from European countries to initiate further lockdowns. After a partial lockdown in The Netherlands, Austria moved to lockdown the unvaccinated, while Germany are also implementing strict measures as virus cases hit records.
There have been talks of similar lockdowns in the UK, but others have said the booster jabs could limit cases in the UK. The pound sterling versus the euro will continue to drive higher on UK rate hike expectations but the gains will depend on the virus path.
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