February 3, 2021 – Written by John Cameron
GBP/EUR Exchange Rate Rangebound as Fears Rise Over UK Contraction
The Pound to Euro exchange rate held steady today, with the pairing currently fluctuating around €1.13.
Sterling was rangebound against the single currency today despite concerns that the UK economy could be set for a contraction in the first quarter. However, the UK’s extensive Covid-19 vaccine rollout has sparked hopes of a recovery in the months ahead.
Today also saw the publication of the final UK Services PMI for January, which beat forecasts but remained firmly in contraction territory at 39.5.
Analysts at Markit reported:
‘Despite a sharp downturn in client demand due to the coronavirus pandemic, the latest survey indicated that business optimism improved for the third consecutive month. The degree of positive sentiment was the strongest since May 2014. This largely reflected the successful UK vaccine rollout so far in 2021 and hopes of a strong rebound in economic conditions as the pandemic situation improves.’
Meanwhile, daily cases of the coronavirus in the UK continue to fall, with the figure down by -3,249 against last week. Hospital figures are also decreasing, with the figure at 32,466, down by -5,211 compared to the previous week.
UK vaccinations continue to be rolled out, with 14.4% of the population now having received the first dose of the vaccine.
As a result, GBP investors are hopeful that the UK economy could begin to recover in spring this year.
Euro Steady as Eurozone Inflation Rise in January
The Euro held steady against the Pound today following the publication of the flash Eurozone Consumer Price Index (CPI) for January. The figure beat forecasts, rising by 1.4%.
Meanwhile, the flash year-on-year CPI figure rose by 0.9%.
Bert Colijn, the senior Eurozone Economist at ING, commented:
‘[T]emporary factors are pushing up inflation at the moment, and there is more to come. Expect prices for product categories impacted by social distancing measures to return to normal levels when the economy reopens – think package holidays, accommodation and transport.
‘When that will happen ultimately depends on the development of the virus and the pace of vaccination, but once it does occur it is set to push up inflation even further.’
However, Europe’s coronavirus vaccine lag is dragging on confidence in the Eurozone’s economic recovery.
Today also saw the publication of January’s PMI Composite data for January, which edged higher at 47.8, but remained in contraction territory.
GBP/EUR Outlook: Could a Dovish Bank of England Drag Down Sterling?
Pound investors are awaiting tomorrow’s interest rate decision from the Bank of England (BoE). The BoE is expected to hold interest rates at 0.1%.
However, if the notably downbeat in its policy going forward, then we could see Sterling begin to suffer.
Tomorrow will also see the release of January’s UK Construction PMI data. Any improvement in the outlook for the UK’s construction sector would be GBP-positive.
The GBP/EUR exchange rate will continue to be directed by the UK’s Covid-19 vaccination efforts. If the infection rate continues to fall, and vaccination numbers increase, then the Pound would head higher.
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