Shannon Stephens
November 24, 2021

COVID-19 Restrictions Continue to Pressure Euro

GBP

This past week we have seen the GBP/EUR exchange rate increase to a new 21-month high. Reports have suggested that this new high has come after the release of the UKs’ inflation and employment data that sits above the predicted expectations. Figures published last week revealed that the cost of living rose to the highest it has been in almost 10 years sitting at 4.2% in October alone. Reasons for this include: the rise in demand for oil and gas, supply shortages, and the end of Government support to businesses during the pandemic. Reports suggest that this data will put pressure on the Bank of England to potentially impose a rate hike in the December meeting, which would be the first-rate hike in 13 years since the 2008 Financial Crisis. A rate hike is one of the Bank of England’s methods that can raise the cost of borrowing. Economic theory supports the concept of by raising interest rates, consumers and businesses will borrow and spend less resulting in a smaller disparity between supply and demand.

With recent news of a surge in Coronavirus cases across Europe paired with the increased chance of more lockdowns, we have seen Austria and Germany impose restrictions on those who are unvaccinated with the potential to impose full lockdowns to slow the spread through the winter months, although it has been expressed that this winter will be nothing like last years ‘catastrophic winter wave’. Nonetheless, this news could result in a decline for the Eurozone’s recovery that could result in a weakening of the currency.

Looking ahead we have the German IFO business sentiment which is one of Germanys biggest think tanks that analyses Economic Policy which could shed some light on what we could expect for the pair as well as the final GDP (Gross Domestic Product) reading. GDP is used as one of the main indicators of economic health where a higher-than-expected reading would be seen as positive for the currency. Other news regarding movement will more than likely be driven by the latest news on the virus as Europe prepare for upcoming restrictions and lockdowns.

EUR

Last week we saw a weaking of the Euro against the Pound and the USD which can be summarised by the imposition of various lockdowns and restrictions across Europe to curb the spread of the virus in a battle to ensure their economic recovery does not take a downturn. Germany is currently experiencing its fourth wave of Covid-19 with almost 46,000 new cases in 24 hours as well as over 300 deaths. German Health Minister Jens Sphan warned that they were aiming for 75% of their population to be vaccinated but only 68% has been fully vaccinated to date. Due to this, various countries are now pushing for vaccinations to become compulsory, with Austria stating they aim to have their full population vaccinated by February 2022, which could therefore increase their productive efficiency and some strength for the Euro.

Today, we have the German Current Assessment and Expectations to be released as this is a close indicator of their ‘current conditions and business expectations’ for the country. The assessment involves a survey that needs to be completed by more than 7,000 businesses on their current and short-term plans. Research has suggested that this is a great indicator of a country’s economic position as a positive view following the survey forecasts bullish movements for the Euro.

This Friday, the ECB will be holding a Monetary Policy Meeting which will contain an ‘overview of the financial market and monetary developments.’ It will provide a reflection on the monetary policy decisions as well as educating the public on the current economic condition.

USD

The USD has continued to outshine its major rivals this past week but there is a rising concern of inflationary pressure that the Federal Reserve has not prepared for. Research has suggested that turning a blind eye would be a ‘backward’ approach as the FED shouldn’t wait around but instead should raise interest rates to combat inflation. We could see the FED raise interest rates twice next year, 6 months apart, but nothing has been finalised yet.

Yesterday, US President Joe Biden gave a speech on the state of the economy as well as plans to target inflation as it has now hit a 31 year high. This comes as gas prices have soared by almost 50%. Jerome Powell, who has been nominated for a second term as the Chair of the FED board expressed that they know high inflation has a negative effect on families, with those less able to meet the higher costs of essentials, like food, housing and transportation and has stated that he intends to use the tools of the Central Bank to reduce the negative effects inflation has on the economy.

Later, this evening, we can expect to see the Minutes of the Federal Open Market Committee (FOMC) to review various economic and financial decisions as well as monetary policy and plans to sustain economic growth. It will also provide a clear forecast of the future US interest rate policy.

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