The EUR/GBP pair is a popular pair and belongs to the minor forex pairs group. It is a cross currency pair as it involves two currencies which are valued against a third currency, the US dollar. The EUR/GBP shows how many pounds are needed to buy one euro.

Cross currency pair

When a cross-currency pair is exchanged, two transactions take place. The first one involves trading one currency for its equivalent in US dollars, and the second involves the exchange of US dollars to another currency.

EUR/GBP: limited volatility

The euro-pound cross tends to have very limited volatility on a daily basis, and usually fluctuates when very important events happen in either of the two economies, such as Bank of England or European Central Bank announcements on monetary policy, or political tensions such as the recent conflict in Ukraine.

Key institutions

  • The European Central Bank (ECB)

The European Central Bank (ECB) is the central bank that determines the monetary policy for the Eurozone and ensures price stability, so that the euro’s purchasing power is not affected by inflation. The ECB’s main goal is to keep year-on-year consumer prices from rising too much and has an inflation target of around 2% in the medium term. The central bank is also responsible for the money supply. The European Central Bank operates through the Executive Board, the Governing Council and the General Council. Christine Lagarde is the ECB President since November 2019. She had served as Chairman and Managing Director of the International Monetary Fund between 2011-2019. Her comments as ECB President are very important as they can influence the market and the euro in the near term. If the bank has a hawkish outlook or Lagarde’s comments strike a determined tone to act then this is seen as positive/bullish for the EUR, while a dovish tone is seen as negative/bearish.

  • The Bank of England

The Bank of England is the central bank of the United Kingdom. The BoE is focused on maintaining monetary and financial stability in Britain, but also producing secure banknotes, operating an asset purchase facility and keeping inflation within the target. The bank is accountable to Parliament and the public. Andrew Bailey has been Governor of the Bank of England since March 2020. Prior to becoming the Governor, he worked at the Bank as Executive Director for Banking Services and Chief Cashier, as well as Head of the Bank's Special Resolution Unit. He also had the position of the  Governor's Private Secretary, and acted as the Head of the International Economic Analysis Division in Monetary Analysis.

When does the euro tend to rise?

According to analysts, the euro tends to strengthen when the ECB is optimistic, ECB members sound more hawkish and rates are expected to increase. If the ECB is more optimistic and ready to act than other banks, especially the Fed, then this is also supportive of the euro. When the economy in Europe shows positive signs that is growing and when Lagarde refers to less risks or sounds positive, the euro also rises.

When does the euro tend to weaken?

Any talk about rates falling, drives the euro lower. Similarly, any gloomy news or disappointing tone from the ECB, signs of recession in the Eurozone, or political uncertainty such as Macron losing a majority are also influential and tend to weaken the single currency. The ongoing war between Russia and Ukraine is also another negative for the euro. The euro tends to weaken as inflation rises and growth slows down.

When does the pound tend to strengthen?

When the economic outlook for the UK appears optimistic and rosy then the pound strengthens. Analysts have noted that the emergence of a more stable Conservative PM could also provide support to Sterling. As with other central banks, an optimistic and hawkish Bank of England tends to drive the pound higher. Additionally, the BoE’s intention to push rates higher is usually supportive of the pound.

When does the pound tend to weaken?

Rising energy and food prices and the BoE’s reluctance to act and tackle inflation usually push the pound lower. Additionally, projections for a possible recession and a weak, gloomy outlook also tend to weaken the pound. A slowdown in growth and a slower rate hike cycle can also push the pound lower. The rising cost of living crisis and further risks to the economy are negative for the pound.

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The pound to US dollar exchange rate struggled to recover on Friday and hit multi-week lows due to market fears and Brexit concerns. The pound and euro weakened further after the release of the US inflation data, with the pound falling to a three-week low.

Stock markets tumbled after US inflation hit a 40-year high, while the dollar rose against major currencies, as traders expect the Fed to raise interest rates sharply in the months ahead to curb inflationary pressures.

The mixed market conditions and the risk-averse trading conditions have not helped the GBP/USD pair. Some traders were also cautious, as they expect the pound to go lower if concerns about the weakening economy persist. According to Reuters, a REC survey out on Friday showed that the labour market is also losing momentum with UK employers hiring staff at the slowest pace since early 2021.

Yesterday, the ECB rattled the markets after it said there will be a 25-basis points rate hike in July but did not manage to convince markets that they will go for a 50 bps increase in September. The announcement pushed the single currency lower.  

Markets slide following US CPI

On Friday, both the euro and the pound fell after the release of the US inflation data. US inflation hit a four-decade high of 8.6% in the year to May, rising faster than earnings, and with the average American suffering a real wage cut.

The war in Ukraine and the Covid lockdowns in China have added more pressure on the rate of inflation and experts expect further higher readings.

The Fed will have the difficult task to ensure that inflation expectations don’t become ingrained, but they will also continue tightening policy while the economy is slowing. This jump in US inflation confirms that the Fed will continue its rate hikes until inflation finally starts to fade, even if the economy is struggling.

 UK inflation expectations have risen

Bank of England’s quarterly survey has found that the public’s expectations for the rate of inflation in a year’s time have increased with inflation in 12 months expected to be 4.6%, higher than February’s 4.3%. People expect prices to continue to rise for the next years, with expectations for two- and five years’ time rising to 3.4% and 3.5%, which are the highest since 2013 and 2019 respectively.

Brexit

Traders remain sceptical about the UK’s economic condition due to Brexit, Covid and the Russia-Ukraine conflict. PM Johnson’s willingness to unilaterally repeal the Brexit deal is also a concern for the pound as the European Union has warned that it will retaliate by imposing harsh sanctions on the UK and cut trade ties.

More generally, rising concerns over higher and faster rate hikes and their impact on growth as well as the war in Ukraine will continue to influence the markets and the pound to US dollar currency pair, in particular.

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The euro rose against the pound and the US dollar after hawkish comments by European Central Bank (ECB) policymakers who have indicated that the ECB could raise interest rates as soon as July. The euro-pound exchange rate rallied to a near two-week high as a result of the comments.

ECB policymaker Martins Kazaks said on Wednesday that an ECB rate hike could be delivered as soon as July. Policymaker Pierre Wunsch told Bloomberg early Thursday that policy rates could rise this year and ECB Vice President Luis de Guindos added that he was expecting the QE to end in July to open the way for an interest-rate increase the same month.

Later, on Thursday, markets will focus on ECB President Christine Lagarde's speech which could also contribute to the euro’s strength. On the other hand, the British pound has struggled to gain any momentum. Investors will remain cautious, however, as concerns about the potential economic fallout from the war in Ukraine could deter traders from investing aggressively and limit any gains for the euro in the near term.

ECB comments

Various comments by ECB policymakers seem to be an attempt to prepare markets for an interest rate hike which in turn has raised European bond yields and supported the euro exchange rates.

On Thursday, ECB Governing Council member Pierre Wunsch said that the ECB could raise policy rates above zero before the end of the year: "Without any really bad news coming from that front (Ukraine), hiking by the end of this year to zero or slightly positive territory for me would be a no brainer.”

Comments by de Guindos have been taken more seriously as he is closer to the centre of the Governing Council, as analysts pointed out. de Guindos said that it was "crystal clear" that the ECB forecasts to be released in June will show higher inflation and lower growth expectations. But, the possibility of a recession and stagflation in the Eurozone was not likely and for this reason it was reasonable to consider tightening in monetary policy. He noted: "I see no reason why we should not discontinue our Asset Purchase Program in July... for the first-rate hike we will have to see our projections, the different scenarios.” He added: "From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide."

Euro to remain supported

The ECB said earlier in March that it intended to end its quantitative easing in the third quarter, but this has moved sooner now. The earlier timing and higher number of rate hikes that are now being priced in for this year will be supportive of the euro.

The single currency had a difficult time recently as the ECB postponed any plans for interest rate hikes compared to other central banks who had moved to normalise interest rates. Even more recently, in its April policy update, the ECB struck a reserved and cautious tone and offered no indication for an imminent interest rate rise. The latest hawkish comments by Kazaks and de Guindos demonstrate a radical shift and perhaps reveal a change of thought at the central bank. Any further comments or similar developments could boost the euro further.

Traders will closely watch later today the appearances from the ECB President Christine Lagarde, FOMC Chairman Powell and Bank of England Governor Andrew Bailey who will speak at the IMF Spring meetings. Unless Lagarde disappoints markets by dismissing the idea of hiking the policy rate in early-Q3, the euro will remain supported.

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The pound rose against the US dollar in early trade, its highest in a week. It was also higher against the euro after the European Central Bank’s policy update did not offer any signs that it will proceed to raising interest rates any time soon. The ECB’s guidance was similar to the last one in May and disappointed markets who were expecting that policy makers would be more decisive about a 2022 rate hike to fight surging inflation.

While inflation is a global concern, the ECB avoided signalling an end to its bond purchase programme and stated they would continue to buy assets even after they start raising rates. The euro weakened following the news.

Inflation to remain high

In its statement, the ECB said that inflation has increased considerably and will remain high in the coming months because of the high energy prices. The bank did not show it was extremely concerned about wider price pressures in the economy. Earlier in March, the ECB said that it would end its asset purchase programme one quarter earlier than before which helped to push the euro higher. This is why market expectations were high today, and market participants were disappointed as the statement was not as aggressive as expected and no new policy changes were announced.

Many investors were looking for a more “hawkish” tone as inflation has risen especially following the war in Ukraine. The ECB did not touch upon the issue of interest rate rises, despite that the market was expecting 60 basis points of hikes for 2022.

ECB Press Conference

In a press conference, ECB President Christine Lagarde said that the central bank was focused on ending the asset purchase programme before raising rates, with the first hike coming some time after the ending of the asset purchase programme. Lagarde said: "We will maintain optionality, gradualism and flexibility in the conduct of our monetary policy.” Analysts expect the earliest rate to come in December, with the 60-basis point being an over optimistic forecast.  

At the conference, there was no mention of the new emergency tools that the ECB was exploring if bond yields of peripheral economies rose. The ECB was creating a so-called backstop to be used against debt-market pressures outside the control of individual governments.

The ECB’s cautious tone today drove the euro lower as the market was not expecting a softer attitude amidst surging inflation. European Central Bank chief Christine Lagarde’s comments were seen as a sign that the bank was not in a hurry to raise interest rates and offered no hard schedule and little specifics beyond the coming months. As she said, “We'll deal with interest rates when we get there."

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The pound has weakened after the Bank of England’s cautious guidance that markets are expecting more interest rate hikes than the Bank thinks are necessary. The UK currency fell against all its major peers in response to the divergence between what the market is expecting and what the Bank will deliver. The Bank's Monetary Policy Committee (MPC) on Thursday voted 8-1 to hike rates by 25 basis points.

While the Bank admitted that further hikes could be necessary, it noted that the market's expectation for the Bank Rate to be at 2.0% by the end of the year was too extreme. The news has disappointed markets as the Bank’s tone was not as hawkish and optimistic as expected. The market was pricing in a further 134 basis points of hikes for 2022 but after Thursday’s policy update, this has been reduced to 123 points.

BoE concerns

The Bank is now clearly concerned that the war in Ukraine will push inflation higher and will affect consumers and businesses, slowing down economic growth. With higher energy, food and commodity prices having increased due to the war in Ukraine, inflations will skyrocket to around 8% in April according to the Bank's forecasts.

The Bank worries that inflation will hurt demand as it expects it to fall faster than initially forecast over the medium-term. Hiking interest rates over-aggressively will help very little when inflation falls back. This is why the Bank has reduced some of its rate hike expectations. The Bank’s more dovish and cautious tone has weakened the pound, as markets are slowly digesting the news.

The foreign exchange market has diminished its expectations for 50bps hikes to be delivered at upcoming policy meetings and expects four more 25bps hikes at successive meetings up until September with another rate hike in 2023. The need for a more modest approach in the coming months is something that the Bank now considers to be more appropriate.

According to analysts, the Bank is in a difficult position as it is raising rates to tame inflation due to supply chain issues while at the same time the cost-of-living squeeze is affecting households.

The war in Ukraine will continue to hurt the pound and a possible de-escalation will offer support to the British currency.

ECB and the euro

The pound is expected to remain supported as analysts say, since the BoE will continue its interest rate hikes, but in the long term, the euro could benefit from expectations that the European Central Bank (ECB) will start changing its monetary policy and raise interest rates soon. According to Reuters, the President of European Central Bank, Christine Lagarde, said on Thursday during a news conference that the ECB has no intention of raising interest rates until some time after it has ended its bond buying programme at the end of the third quarter. Lagarde said: "Any adjustment to the key ECB interest rates will take place some time after the end of our net purchases under the APP (Asset Purchase Programme) and will be gradual.” Markets are now pricing in around 43bps worth of interest rate hikes this year. Investors have scaled back their expectations on rate hikes since the war in Ukraine broke out. The ECB president had discussed raising interest rates at a news conference on the 2nd of February despite insisting in the past that such a move was "very unlikely" in 2022.

Sterling could record new gains against the US dollar in the coming weeks as more economic releases support expectations for Bank of England (BoE) tightening.

FX Strategists at UOB Group, have noted that the pound rose more than expected yesterday and this upward momentum could continue unless the British currency falls within the next couple of days.

However, the persistent Russia-Ukraine tensions will continue to impact on both the pound to euro and the pound to US dollar exchange rates.

GBP/EUR and GBP/USD: Ukraine-Russia tensions

The pound could maintain an upward trend against the euro, but analysts believe that the euro will prevail. The main driver for the pound to euro exchange rate is the Ukraine-Russian situation. The last week, we have witnessed the pound rising and falling, before recovering as news on the geopolitical tensions created volatility.  On Wednesday, optimism returned to markets but soon faded as it was made clear that nothing has changed and that over 120K Russian troops were still stationed on Ukraine's borders with little progress having been made.

This is why the pound to euro exchange rate will move according to news and speculation relating to the Ukraine-Russia issue.

The uncertainty about the Russia-Ukraine conflict will also put the pound to US dollar exchange rate at risk. Reports claiming that Ukraine has bombed separatists' positions in east Ukraine caused safe-haven flows to dominate the markets. Ukraine denied these claims and the Ukrainian military reported that Russian occupying forces fired on a village in the Luhansk region. A senior White House official said that Russia’s claim that is moving troops away from Ukraine’s border is false. He also warned that Russia could launch a false pretext to invade Ukraine at any moment. These developments have soured market mood as investors remain on edge.

A further escalation of geopolitical tensions could weigh on GBP/USD while a positive shift in risk sentiment will boost the pound.

European Central Bank

The turn in the European Central Bank’s policy which was announced on their 3rd of February update has supported the euro. The ECB said that due to inflationary pressures they would no longer be against a rate hike in 2022, which has led the market to price in a number of 10 point hikes to the Deposit Rate, that would take it back to 0% by the end of 2022. For the GBP/EUR currency exchange rate, what will determine its performance will be the timing of monetary policy tightening in relation to that of the Bank of England.

Foreign exchange strategists at HSBC believe that the euro will rise against the pound as they see  the Bank of England disappointing market expectations. They said: "We think there appears to be room for the Bank of England to disappoint relative to market pricing, which has more than a 50% chance of a 50bp hike.”

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The pound is expected to remain supported by market expectations of further interest rate hikes, according to analysts. The prospect of a much stronger euro is although questionable, as it is believed that the euro rally following last week's European Central Bank comments has possibly run out of steam.

The pound rallied against the euro and reached its highest level in two years last Thursday after the Bank of England raised interest rates, but those gains were soon erased by the Governor Andrew Bailey’s cautious tone and warnings about slowing domestic growth.

Sterling to remain supported

However, analysts have stressed that the Bank’s determination to hike rates to control inflation and the fact that it has overdelivered in the last two meetings, should keep further rate expectations high and sterling supported. Barclays forecast that the Bank will hike 25bp back-to-back in both March and May. Barclays also expect the pound to strengthen against the US dollar but drop against the euro by mid-2022.

It has also been argued by analysts that there are some factors that offer support to Sterling and suggest the economic outlook is not that negative. Paul Robson, Head of G10 FX Strategy, EMEA, at NatWest Market has mentioned that the January UK PMIs indicate a decent pick-up in activity in the last week of January, while the government’s announcement of fiscal measures will help to balance the cost-of-living rise. He also added that the removal of travel restrictions could support sectors of the economy that have been hit by the pandemic.

Concerns about the pound outlook

Analysts remain cautious about the pound’s appreciation and note that its gains might be limited due to the adverse economic background against which the BoE is tightening its monetary policy.

Additionally, the Bank’s hiking cycle is now fully price in by markets and any unexpected changes and disappointment could result in pound weakness.

ECB and interest rate hikes

Analysts have also pointed out that the market might be already pricing in too many interest rate hikes from the ECB. When last week the ECB said all members of the governing council were concerned about Eurozone inflation, markets understood that it might change its policy and start tightening monetary policy like other central banks. The market now expects two hikes, but for rates to be hiked in 2022, then the tapering of quantitative easing will have to accelerate, especially since  ECB President Christine Lagarde is resolute that the normal sequence of QE and then rate hikes will be followed.

Barclays have said that they now expect a March announcement of a faster tapering of asset purchase and 25bp rate hikes in both March and September 2023. Markets now expect the ECB to hike and tighten monetary policy much earlier than expected and closer to the US Federal Reserve and Bank of England. This scenario will be supportive of the euro.

On Monday, ECB President Christine Lagarde emphasised that Eurozone inflation risks are on the rise, but price pressures could still recede. She said: “Demand conditions in the euro area do not show the same signs of overheating that can be observed in other major economies.” She added: “This increases the likelihood that the current price pressures will subside before becoming entrenched, enabling us to deliver on our 2% target over the medium term.” Markets now price 50 basis points of rate hikes for 2022, but economists are more careful, with most forecasting the first one at the end of the year or early 2023. Of course, markets will gain more clarity as we move closer to the ECB's March policy meeting.

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The pound dropped against the euro last week but could slowly recover if the euro does not rise any further. Sterling rose sharply after the Bank of England’s Thursday decision to lift the Bank Rate from 0.25% to 0.50%, but experienced losses when Governor Andrew Bailey and other members of the Bank’s Monetary Policy Committee warned of risks to economic growth and that meeting market expectations for the Bank Rate could eventually lead inflation to fall below the Bank’s target level of 2%.

The forecast for inflation anticipates inflation to remain elevated above the Bank’s target for more than two years and to fall below 2% in 2025. This means that the Bank might avoid raising rates in 2023, despite market expectations.

Thursday’s European Central Bank (ECB) policy decision

Sterling fell due to the Bank of England’s cautious tone and concerns about the effects of the recent increase in energy and international traded goods prices. But it was the hawkish shift of the European Central Bank last Thursday that also deflated the pound and boosted the euro. The foreign exchange market moved sharply and resulted in the euro rising higher. After ECB president Christine Lagarde said that Eurozone inflation risks have increased, financial markets expectations for a potential end of negative interest rates rose. The euro rally could extend, and this will be an ongoing risk for the pound.

Rising inflation and cost of living squeeze

Economists have warned on Monday that inflation will hit UK economic growth this year as consumers have to deal with the rising cost of living.  In its latest quarterly assessment of the economy the EY Item Club has cut its forecast for UK economic growth this year to 4.9%, as the squeeze on households’ spending power and the omicron variant slow economic recovery. The EY predicts inflation to hit 7% in the spring and real wages to fall. They also expect the Bank of England to hike the Bank Rate to 1% by the end of this year.

Hywel Ball, EY’s UK chair, says: “The forecast shows that the economy’s bounce back in 2021 was stronger-than-expected and Omicron’s economic impact is likely to be temporary and limited. While the economy and UK businesses may have a softer launch pad for growth this year, they will still benefit from a number of tailwinds in 2022 and 2023. But blowing in the opposite direction will be a squeeze on household spending power which is expected to be a bigger headwind for the economy than the Omicron variant. Inflation is set to reach its highest level in thirty years by the spring and will be well ahead of pay growth. Although the latest forecast says that the economic scarring from the pandemic is likely to be minimal, policymakers still face the challenge of how they help support households through the forthcoming squeeze on their finances and give companies the confidence needed to unlock business investment. The push towards Net Zero certainly creates an opportunity for investment growth.”

What to watch this week

The pound will be sensitive to any comments made by BoE Chief Economist Huw Pill on Wednesday’s online event with the Society of Professional Economists and Governor Andrew Bailey on Thursday’s online event hosted by TheCityUK. Friday’s UK GDP figures for December and the final quarter will also reflect the effects of the Omicron variant on economic activity into the end of the year. The GDP is expected to have fallen by -0.5% in December and to have grown by 1.1% for the final quarter.

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Despite Sterling rising yesterday following the Bank of England’s positive tone and the prospect of an early rate hike in 2022, on Friday it fell.

Asian and European stock markets were also down on Friday as well as risk-oriented currencies as the potential default of Evergrande can have significant repercussions on markets.

Pound and BoE

After the Bank of England’s meeting on Thursday, markets have brought their expectations forward as now the BoE is expected to start a rate hike cycle with a first increase in May 2022, followed by a second one in November 2022. While there are still uncertainties ahead for the pound, the British currency is still forecast to strengthen against the US dollar and the euro over the medium-term, as some analysts believe.  

Rate hike expected in early 2022

With markets now pricing in the first rate in the first quarter of 2022, the pound will find support, despite questions about the country’s economic recovery. Challenges will continue to exist, including unemployment and labour shortages that have become more prominent due to Brexit. Some analysts believe that if unemployment does not rise then the Bank’s Monetary Policy Committee could even add a small rate hike as soon as February. With market expectations for a rate hike already priced in, it is likely that the Bank will have to raise rates in early 2022 as it could otherwise create confusion and push the pound lower. For example, big banks such as JP Morgan have brought their expectations forward for a rate rise in early 2022 following the Bank’s announcement yesterday. Capital Economics said: "The Bank is moving closer to raising interest rates. As such, we now think that rates could rise in early 2022, rather than in 2023 as we had previously thought." They also added: "Given the gloomy tone of the recent news on economic activity, we had expected the MPC to place some weight on the downside risks to GDP growth.” However, the Bank’s minutes stressed price stability and the inflation target which remains the same. The Bank highlighted that growth uncertainties were external and depended on global supply chain limitations.

For Sterling, any news about when the rate hikes will start or the vote on QE will be key. Both Dave Ramsden and Michael Saunders voted to lower the purchase rate to £840bn instead of the £875bn. The fact that two policymakers want to tighten the policy is important.

Earlier interest rate hikes will offer more support to pound

With interest rate expectations and a first rate to take place for Q1 next year, the pound is expected to find support. It could rise even further if such expectations move even more forward.  While raising interest rates might not affect inflation, what other Central Banks do does have an effect on global markets and policy. The ECB and the Federal Reserve have both announced that they will begin the tapering and reduce their stimulus support, and if the Bank of England does not follow suit the pound could go lower, something that could push inflation to rise and import prices to go higher.

If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

On Wednesday (03/06/20), the Euro was up against the US dollar, marking its seventh consecutive day and the “longest winning streak since December 2013.” The euro’s surge is the result of investors moving away from the US dollar as well as news that the European Commission will be helping the Eurozone economy with a 750 billion euro ($826.5 billion) fund to ease the damage from the pandemic.

The Euro had a roller coaster ride the last few years. Recently, due to slower economic growth, the Euro has dropped, but there have been signs of increase as the Covid-19 pandemic hit financial markets and investors turned towards the safety of government bonds. But soon it fell again, as investors turned to safe-haven assets such as the US dollar. Since mid-March, the euro has been at its highest after the significant decrease of new coronavirus cases in the EU.

With the continued uncertainty due to the coronavirus pandemic and the ongoing Brexit negotiations, the Euro will remain sensitive. But let’s see what the main drivers of the euro in the coming months are.

Key Drivers of the Euro

Apart from the coronavirus pandemic and Brexit updates, the Euro is sensitive to releases of macroeconomic data including GDP, unemployment rates, manufacturing and services output and consumer price indices which measure the Eurozone economy’s health. Significant events such as meetings of the European Central Bank (ECB) and updates regarding policy on interest rates and fiscal stimulus, can also impact on the single currency. For example, low interest rates are unattractive to investors.

If the US Dollar rises, as the US economy strengthens and interest rates are increased by the Federal Reserve, then this will weigh on the Euro. There are also dangers from weaker global growth and a slowing of the EU member states’ economies, especially the German economy.

Last but not least, if the Chinese economy slows and China’s trade is reduced, then there will be less demand for European imports.

European Commission forecast for the Eurozone economy

In its Spring 2020 Economic Forecast, the European Commission reported that the coronavirus pandemic will have “very severe socio-economic consequences” for the global and EU economies. It has forecast that “the euro area economy will contract by a record 7¾% in 2020 and grow by 6¼% in 2021. The EU economy is forecast to contract by 7½% in 2020 and grow by around 6% in 2021. Growth projections for the EU and euro area have been revised down by around nine percentage points compared to the Autumn 2019 Economic Forecast.”

Paolo Gentiloni, European Commissioner for the Economy, said: “Europe is experiencing an economic shock without precedent since the Great Depression. Both the depth of the recession and the strength of recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of services like tourism in each economy and by each country's financial resources. Such divergence poses a threat to the single market and the euro area - yet it can be mitigated through decisive, joint European action. We must rise to this challenge.”

Economists’ Predictions in the near- and long-term

According to Citibank, “Second waves of crisis, trade wars and the ECB’s future reaction will likely keep EUR soft near term and upside capped medium term despite a lot of bad news in the price.”

In the long-term, analysts at CIBC expect the Euro to rise: “While euro sentiment remains compromised by the lack of political coherence, we’ve seen the ECB taking action by expanding its balance sheet. However, that move has been dwarfed by the additional supply of USD currently being injected into the market, which remains supportive for the EUR/USD pair.” They added that positive fund flows as a result of the Eurozone current account surplus will benefit the euro, despite political uncertainty.

Natixis Research expects Eurozone inflation to return in 2021 due to the “decline in productivity and the increase in unit production costs due to the new health standards taken because of the coronavirus pandemic.” In turn, the increase in inflation will lead to a rise in long-term interest rates which will support the euro.

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