The EUR to GBP exchange rate was trading at the key November support level of 0.8870 in early Friday trading. The price was a strong support during the Brexit negotiations and could open a door to strong gains in the pound if it is breached.
The UK economy saw a 2.6% drop in November with a big hit to the important services sector but the market is focusing on the UK’s quick vaccine rollout. Minutes from the latest ECB meeting also underlined the bank’s concern about euro strength.
UK Economy Hit by Government Lockdowns
The UK economy saw a 2.6% drop in November according to today’s data release from the ONS. The drop leaves the UK economy 8.5% below its pre-virus peak. Britain’s important services sector plunged 3.4% for the month, which was the largest drop since the ONS started tracking the sector in 1997.
The figures for November come at the tail-end of the UK’s reopening and the data in coming weeks could paint a bleaker picture. Despite this, the European economy saw its own lockdowns and traders are pricing this in to the EURGBP rate. The services sector is the most important for the UK economy with a large percentage of the country’s income based in the hard-hit industries like travel and hospitality.
The pound has strengthened in recent sessions as the UK government’s vaccine rollout gathers pace. Around 3 million have been vaccinated already and the government are on track to deliver 15 million jabs by mid-February.
ECB December Meeting Discusses Higher Euro
The latest meeting minutes released by the European Central Bank showed support for its stimulus package which will provide support to markets into March 2022.
There were also further statements regarding the euro and bank’s discomfort with strength in the currency. The euro saw a big move higher in the second half of 2020 after a collapse in the US Dollar and ECB members said in the minutes the currency gains, “could contribute significantly to the subdued inflation outlook”.
This was seen in Eurozone inflation which is very close to zero and far from the bank’s 2% target. Some members of the bank had talked of intervention last year to cool the price of the currency and this would be a risk to the euro in the year ahead. Any action would likely be with words in the first instance but the current lockdowns could see further strain on the inflation rate and the ECB are unlikely to accept any major strength in the euro.
EURGBP has support below at the 0.8700 level and the pair should see volatility next week with a host of indicators, including inflation, ZEW sentiment and an ECB interest rate decision.
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