Currency outlook: Euro plunges to 2021 low amidst European Covid resurgence, Pound rocked by the BoE’s miscommunication

LOOKING AHEAD: The single currency could face an uphill battle in the coming weeks.

Euro
EUR/GBP: Unmoved at £0.84
EUR/USD: Down from $1.16 to $1.12

The euro has come under some consistent pressure over the past month, with the single currency slumping to year-to-date lows against the US dollar. This slump in EUR exchange rates has been partially attributed to the European Central Bank (ECB) as the policy divergence between it and the other major central banks only looks to be growing wider as the ECB remains glued to its dovish bias.

Accelerating the downtrend in the euro through the second half of November has been the dramatic resurgence of Covid cases in many parts of Europe, which has prompted countries such as Austria to reimpose lockdown measures. Looking ahead, the single currency could face an uphill battle in the coming weeks if the Eurozone’s economic recovery is undermined by more countries being forced to impose restrictions.

Pound
GBP/EUR: Unmoved at €1.18
GBP/USD: Down from $1.37 to $1.34

The pound has traded in a wide range over the past four weeks, as the currency was rocked by the Bank of England’s (BoE) latest interest rate decision. Ahead of its November policy meeting, a series of hawkish comments from BoE policymakers had seen the majority of GBP investors price in an interest rate hike this month. However, the BoE then pulled the rug out from underneath the pound after it opted not to hike rates, leading to accusations of governor Andrew Bailey being an ‘unreliable boyfriend’, a moniker which was previously given to his predecessor Mark Carney.

Sterling then languished in mid-November amidst heightened Brexit jitters, with GBP investors fearing the UK government’s threat to trigger Article 16 of the Northern Ireland protocol could prompt a UK-EU trade war.

But Sterling rebounded in the second half of November as some stronger-than-expected employment and inflation figures reignited speculation the BoE could hike interest rates by the end of 2021. Hopes for a December rate hike may help to underpin the pound over the next few weeks, but GBP investors are likely to be wary of being too aggressive with their bets, after being wrong footed by the BoE earlier this month.

US Dollar
USD/GBP: Up from £0.72 to $0.74
USD/EUR: Up from €0.85 to €0.88

The US dollar made steady gains over the past month, with the currency being underpinned by a deterioration of market sentiment. There are multiple factors for this, including concerns over slowing growth in China, a resurgence of Covid cases in Europe as well as the collapse of the Turkish Lira, all of which have helped to bolster the appeal of the safe-haven ‘greenback’.

The US dollar was also bolstered by the Federal Reserve’s long-awaited tapering announcement at the start of this month, despite the bank also indicating that its next rate hike may be a little further off than previously forecast. While the Fed was a little more cautious with its forward guidance, a surge in US inflation has seen USD investors predict the US central bank could still hike rates earlier than mid-2022.

The US dollar now looks well poised to maintain its momentum through to the end of the year as renewed coronavirus concerns in Europe and other parts of the world are likely to raise additional questions over the trajectory of the global economic recovery.

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