The GBP EUR exchange rate was lower for a second week after German employment and European inflation added to bullish euro positions. The pound sterling couldn’t recover from the variant-led sell-off or the previous week. Goldman Sachs has predicted a December rate rise by the Bank of England, but they were wrong about November.
The GBP v EUR was trading around the 1.1760 level heading into the weekend.
European inflation heaps pressure on ECB, bank remains stubborn
The week started with German inflation on Monday and that came in at 5.2%, after 4.5% in the previous month.
The reading was the highest rate recorded since January 1997, when the EU data series began.
But the 0.6% growth in September was better than forecast and the UK is now on track to see growth where it was prior to the pandemic at the end of 2019.
ECB board member Isabel Schnabel said the rise did not come as a surprise to the central bank although its earlier forecasts had not predicted such a large increase. Schnabel said the central bank believed that inflation peaked in November, meaning it would be premature to raise rates as price increases look likely to slow next year.
That was echoed on Thursday by another ECB policymaker despite a similar rise in European inflation.
Annual inflation across the 19 euro countries hit 4.9% in November, driven mainly by soaring energy prices, according to Eurostat. That’s the highest number since 1997, when the European Union started collecting data for the launch of the single currency.
“The current inflation spike is temporary and driven largely by supply factors,” ECB board member Fabio Panetta said. “Central banks should have the patience to look through these effects and explain their policies to the people.”
The latest inflation numbers will heap further pressure on the central bank to act to lower inflation, even if the bank remains in denial.
German unemployment was also better than expected at -34k versus -24k expected.
Omnicron talk threatens slowing global economy
The OECD downgraded its forecasts for the global economy, but that was before the latest variant talk. The UK economy was boosted by the group’s forecast that the British economy would outperform its G7 rivals in 2021 and 2022.
However, the UK is still struggling with high virus case numbers above 53,000, while the country saw 42 cases of the new variant. The South African doctor who found the variant said she was shocked the hysteria over what was a mild variant thus far.
The UK Prime Minister has taken a balanced approach to the new variant and tried to head off calls for travel changes. That has supported the pound sterling into the end of the week and Goldman Sachs have also predicted a December rate rise.
Under Goldman’s baseline scenario, “the UK economy will hold up relatively well during the fourth wave, given high vaccine take-up and a successful booster programme.”
“As a result, we still believe that a 15 basis points BoE hike is more likely than not at the December meeting.”
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