GBP/EUR

The pound has pared losses against the Euro and could be supported in the coming weeks with the announcement of a third vaccine being approved and the acceleration of vaccinations, although international factors and the Bank of England’s monetary policy will also have a major sway on the pounds direction.

The GBP/EUR exchange rate was close to one percent lower for the week by Friday after partially recovering earlier losses. This was largely due to the start of a third lockdown and the increased spread of coronavirus infections.

The pound is already the worst performing major currency for 2021 and got to as low as 1.10 in the middle of week but recovered by Friday back to 1.11.

The rising risk is whether the BoE will decide to ease monetary policy further and early. Any boost from the newly agreed trade agreement with the EU have been offset with the possibility of negative interests from the BoE. The bank has been assessing the merits of a negative rate policy and has previously said it will set out findings when the decision from its next meeting is announced on January 28. Several of the BoE’s Monetary Policy Committee members will also deliver speeches this week, which could attract more attention than usual as the market calculates the risk of an experiment with negative interest rates.

In addition, November’s GDP data is due out on Friday, where economists are looking on average for a -4.4% fall as that month saw a toughening of coronavirus-related restrictions when businesses in the hospitality sector were asked to close again.

USD

On Friday, the USD rose against a basket of major currencies after poor December US payrolls raised market expectations for further stimulus measures aimed to aid economic recovery that has been battered by the coronavirus.

Payrolls decreased by 140,000 in December, the first decline in eight months, well below expectations that forecast an increase of 60,000 jobs. The unemployment rate reached 6.7% whilst data throughout last week leading up to Friday’s report indicated a stalling labour market. US president-elect Joe Biden said the jobs report shows Americans needed more immediate relief and that taking action now would help the economy even with deficit financing. The Democrats’ Senate seat wins last week give Biden licence to push through more spending, which some analysts predict will fuel risk and be negative for the USD.

Both the euro and the pound weakened against the dollar as it gained ground on both currencies. The euro was down 0.5% to $1.2209 while sterling was trading at $1.3562, down 0.01% on the day.

Key announcements

• 15.00 – MPC Member Tenreyro Speaks