A Ticking Clock on Brexit and Mixed News About COVID 19 Shapes the Euro Rate

EUR GBP Lower with Higher UK Inflation Reading

All attention in Europe is focused on the ticking clock of the Brexit deal. The will they won’t they saga has been running all year, but now things are really coming down to the crunch. Time is running out and key differences remain over fisheries. Hope remains that the looming deadline will force both sides into some form of agreement. However, the somewhat negative rhetoric emanating from both camps has kept the sterling to euro rate down.

At the time of writing GBP remains stuck as 1.11. However, if a deal is struck, we could expect to see GBP rebound quickly, with some analysts suggesting it could hit 1.13.

Against the dollar, the euro has moved to three month highs. During Asian trading hours the pair rose to 1.1974 with EURUSD looking at monthly gains of 2%.

The euro’s gains have come thanks to positive news from the front against COVID-19. With three vaccines having shown promising stage three test results, hopes have risen that the end of the crisis may be in sight.

Good news from Pfizer, Moderna and the vaccine being developed at Oxford all announced positive trial results earlier in the month boosting hopes of an end to the crisis and a swift economic recovery.

This has been bad news for the traditional safe haven currency of the dollar which has traditionally thrived on the volatility caused by the pandemic. With markets beginning to feel more optimistic for the future appetite is growing for higher risk assets such as the euro.

However, the euro’s gains present a headache for the European Central Bank as it edges towards the 1.20 line in the sand it had drawn against USD. This is the level the bank would not like to see EUR break for fear it could damage the Eurozone’s economic recovery.

Second Wave Woes

The good news about a vaccine runs into bad news elsewhere about the pandemic. Cases have been rising across the continent with Germany, France and the UK among those countries announcing fresh restrictions. The prospect of a third wave hitting in January before a vaccine can take effect continues to grow.

The ongoing crisis pushes back on the chances of a swift ‘V’ shaped economic recovery. Most of the economic news from across the continent is dire with Spain and the UK being particularly badly hit. The UK has suffered its largest economic hit in 300 years while the Eurozone has once again contracted as cases surge once more.

Rather than the hoped for V shaped recovery it looks as if the continent is traversing a much bumpier ‘W’ shaped pattern.

However, the ECB is expected to provide a fresh stimulus package in December, and the dovish outlook may change depending on German Consumer Price Index (CPI) announcements expected later today.

Experts predict the CPI to show the cost of living dropping 0.7% month on month following a 0.1% rise in October. If inflation data beats predictions, the pair could top 1.2.

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