According to Bloomberg, traders are increasingly pessimistic about the pound as they expect the currency to post further declines. Meanwhile, weakened euro sentiment due to the new Covid restrictions has allowed the pound to remain supported, but this will be limited, as analysts have noted.
The pound pessimism is due to a range factors. On the one hand, markets are becoming pessimistic and fear that the Bank of England will not raise interest rates in December. Others are even fearing that a tighter policy will damage the economy. On the other hand, the US dollar is strong on expectations of the Federal Reserve reducing its stimulus programme. Traders are pessimistic as they are concerned about the growth outlook for Britain, with persisting issues as Covid and Brexit uncertainty. There are also concerns that a near-term rate hike will damage the economy and will be a huge policy mistake.
While markets expect an interest rate hike in December, recent comments by Bank of England Governor Andrew Bailey and Chief Economist Huw Pill have cast more doubt, with traders becoming more cautious about unexpected pound volatility. The pound has fallen more than 5% in the past six months. On Monday, it fell again as the dollar rose following news that Jerome Powell was nominated to a second term as the Federal Reserve’s chair.
Analysts expect the pound to fall even further. They believe the UK is exposed to global economic forces and, while supply chain issues are starting to be resolved, there are economic obstacles ahead.
Covid restrictions and the euro
The pound is holding against the euro due to deteriorating sentiment towards the Eurozone following the reintroduction of Covid lockdown restrictions. While the impact is relatively limited, the euro could fall further if Germany introduces tighter restrictions in the coming days.
Covid cases and hospitalisations are on the rise in Germany, and if Covid concerns increase then the euro will suffer more.
The euro has been hurt by the rising cases across the bloc, which has reinforced the dovish outlook for the European Central Bank’s policy.
Germany's response has been to push for higher vaccination rates and increased restrictions for unvaccinated citizens. Germany is worried about the current situation and wants to control it with additional measures to curb a fourth wave in December.
Some economists believe that the current restrictions in the Eurozone will have a limited impact on the economy than previous ones, as the outlook in the long term is positive. Euro weakness is believed to be limited as sentiment could return once the spike in Covid cases reaches its peak. So, if the right measures are taken today to control the spread of the virus, then the potential and short-term euro weakness will be for the benefit of long-term economic recovery.
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