- EUR/GBP will end a torrid week trading at lows amid the euro’s overall underperformance on Friday amid European gridlock fears.
- The pair is back below the 0.8400 level and targeting 21-month lows.
EUR/GBP has turned sharply lower on the last trading day of the week. Falling from levels touched in the Asian session above 0.8420 to below 0.8400 as it anticipates a test of 21-month lows touched earlier in the week at 0.8385.
One of the key reasons of the recent downturn in the EUR/GBP currency pair is the euro’s underperformance. Which comes with concerns over a quick deterioration in the eurozone economy as the pandemic grips the continent.
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Begining Monday, Austria will impose a total blockade on all persons for 20 days. With restrictions remaining for the unvaccinated after that. Furthermore, the country stated that all citizens must be vaccinated by February 1, 2022, or face stiff penalties. From a financial market standpoint, the fact that Germany appears to be closely following is even more concerning.
On Friday, Germany’s health minister warned the country’s health condition had deteriorated to the point where a comprehensive lockout, even of vaccines, could not be ruled out. “A total embargo for Germany would be very terrible news for the economic recovery”. Says a senior portfolio manager at Swiss asset firm Vontobel.
Negative news on the pandemic front in Europe has largely overshadowed a German PPI report
A significantly higher-than-expected German PPI figure for October. As well as hawkish comments from outgoing ECB Governing Council member and Bundesbank President Jens Weidmann, have largely been overshadowed by negative news on the pandemic front in Europe. To be honest, Weidmann is a well-known hawkish voter who has spent the previous decade unable to sway ECB policy. Which is dominated by moderate voters, so his remarks are unlikely to sway the euro. Weidmann is stepping down at the end of the year.
The dip on Friday brings an end to a tumultuous week for EUR/GBP. The pair has lost more than 1.5 percent after peaking above 0.8500. And is now trading around 0.8400, its lowest weekly performance since March 2020. Apart with the severity of the European Covid-19 crisis worsening over the week, the pair has also been pulled down by strong macroeconomic data from the UK.
In a report earlier this week, the latest employment data showed unemployment did not rise after the end of the UK government’s leave scheme at the end of September. Additionally inflation rose more than expected for October.
The October retail sales report released on Friday before the European open beat expectations.
More recently, the October retail sales report released on Friday ahead of the European open beat expectations. Although economists attribute this to consumers filing their holiday/end-of-year shopping amid supply chain concerns. Currency strategists also touted the ongoing story of divergence between the BoE and ECB as a negative.
Many expect the Bank of England to begin raising interest rates in December. While senior ECB policymakers like President Lagarde have been attempting to steer the market away from rate hikes by 2022. Currency markets overlooked comments from ECB hawkish line member Jens Weidmann, who is leaving the bank at the end of the year, and the Bank of England’s chief economist.
In other news, the tone of Brexit developments has shifted this week, with most market participants expecting the UK and EU to finally resolve their disputes over the Northern Ireland Protocol’s implementation.
Bond market movements, which reflect decreasing European economic pessimism, are likely to be a factor. German 10-year rates plummeted 7 basis points this week, to just around -0.35 percent, their lowest level since mid-September, while UK 10-year yields declined less than 5 basis points and remain well above last week’s low of 0.82 percent.