Currency outlook: Euro stumbles as ECB maintains dovish policy outlook
EUR/GBP: Unchanged at £0.85
EUR/USD: Down from $1.17 to $1.16
The euro initially got off to a strong start in September, with the single currency carrying over some of its momentum from late August and supported by some robust Eurozone data releases.
However, the euro’s bullish run was curtailed by the European Central Bank (ECB), which maintained its dovish stance as it concluded its September policy meeting, in spite of also announcing plans to begin reducing the pace of its pandemic emergency purchase programme.
This pullback in the euro through the second half of September was then fuelled by political uncertainty in Germany as well as pressure from a stronger US dollar.
Looking ahead, the single currency could face additional volatility in the weeks to come, as coalition talks in Germany could result in prolonged uncertainty, while the policy divergence between the ECB and Federal Reserve may drag on the single currency.
GBP/EUR: Unchanged at €1.16
GBP/USD: Down from $1.37 $1.36
The pound has traded in a wide range over the past four weeks, in response to growing doubts over the resilience of the UK’s economic recovery.
This comes as businesses express concerns over staff shortages, supply constraints and rising energy prices, the combination of which could lead the rebound in growth to stall in latter half of 2021.
Also spooking GBP investors in early September were concerns over Boris Johnson’s announcement that national insurance contributions would rise in 2022 as part of a ‘healthcare levy’.
But Sterling subsequently rebounded following the Bank of England’s (BoE) September policy meeting, as its hawkish forward guidance prompted GBP investors to start pricing in a March rate hike.
With the UK now facing a fuel shortage, the country’s economic headwinds show no signs of abating. As a result, the pound could face an uphill battle in the coming month, particularly if the end of the government’s furlough scheme results in a sharp rise in unemployment, as some economists predict.
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