- GBP/EUR supported at 1.1749 with scope for recovery
- If global markets stabilise & safe-haven demand ebbs
- On indications markets overreacted to new virus strain
- But governmental responses to latest mutation are key
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The Pound to Euro exchange rate sustained heavy losses during Friday’s rout in global markets but could attempt a recovery this week if investors’ fears about the latest mutated edition of the coronavirus recede, or if the single currency returns to earth following last Friday’s surge.
Sterling slumped against the Euro, Yen and Swiss Franc ahead of the weekend as some of the most popular currency trades of recent times were unwound in the global market rout that followed reports of a new strain of coronavirus having been detected in Africa.
The emergence of the Omnicron strain has seen governments respond by imposing restrictions on international travel and sparked a flight to safety among investors as well as a bonfire of risk assets and currencies late last week.
"Given that COVID has hardly been contained globally at this point and that we do not yet know whether this new variant, with all its mutations, is a greater threat, the market’s reaction seems a little excessive. But investors are prone to shoot first and ask questions later and not stand in the way of these sorts of position unwinds. The process may have a little further to run," said Shaun Osborne, chief FX strategist at Scotiabank, in a Friday note.
Low-yielding funding currencies like the Euro had been sold heavily in exchange for more appealing currencies like Sterling, the Canadian, New Zealand and Australian Dollars in recent times but investors appeared to cash up and walk away from those wagers on Friday.
Above: Pound-to-Euro exchange rate shown at daily intervals with major moving-averages and Fibonacci retracements of November rally indicating possible areas of technical support. 55-day moving average and 61.8% Fibonacci retracement offer support between 1.1749 and 1.1763.
- Reference rates at publication:
- High street bank rates (indicative): 1.1515-1.1598
- Payment specialist rates (indicative: 1.1723-1.1770
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Friday’s position liquidation generated significant demand for the Euro and lifted the Euro to Dollar exchange rate sharply, which helped to push the Pound-to-Euro exchange rate back to 1.1780 where it entered the new week.
Pound to Euro losses have been significant but it could be the case that global markets have overreacted given that South Africa’s experience with the new variant so far suggests that it might cause only mild symptoms in those who contract it.
“The cases that have occurred so far have all been mild cases, mild-to-moderate cases, and that’s a good sign," one South African health official told Sky News in an interview at the weekend.
Much depends on how governments respond to the variant’s inevitable spread across the globe although if it remains the case that symptoms of those infected with the new mutation are mild then it would be a lesser threat to public health systems than other variants in circulation.
“One worst-case scenario involves the entire immunization process having to start from scratch, while the most benign outcome would be the discovery that 'Omicron' is neither much more transmissible nor deadly than earlier variants and that existing vaccines are effective against it,” says Christian Keller, head of economic research at Barclays.
The extent to which the Pound-to-Euro exchange rate is able to recover this week likely depends heavily on whether global markets also recover their footing, although Sterling may also potentially benefit from the latest coronavirus-related developments in Europe and their impact on the Euro.
“The market focus is on Europe, where a surge in COVID-19 cases is raising the prospect of lockdowns going into the Christmas shopping season. Those
concerns continue to weigh on European equity indices as well as the EUR,” says Daniel Been, head of FX research at ANZ.
Some European countries have been steadily reimposing restrictions on activity and social contact for weeks while the Netherlands became the latest to go a step further on Friday when it announced that from Sunday all supposedly non-essential businesses would need to close from 17:00 each day.
Above: Pound-to-Euro exchange rate shown at daily intervals with Euro-Dollar rate.
The increasing return of coronavirus restrictions in Europe was already acting as an outright headwind to the bloc’s economic recovery even before the new virus strain emerged and could mean that last week’s rally in the Euro-Dollar rate is apt to be reversed over the coming days.
That would be beneficial for the Pound-to-Euro exchange rate because it always closely reflects the relative performances of EUR/USD and GBP/USD, and often tends to benefit from declines in EUR/USD.
“The news of a nasty new variant increases the risk of new restrictions, especially in Germany where politicians have been debating this issue fiercely in the past week,” warns Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.
Vistesen and colleagues said on Friday that tightening restrictions on the continent risk compelling the European Central Bank to extend the life of its quantitative easing programme beyond its envisaged end date of March 2022.
They also suggested the renewed focus in markets on the coronavirus and related containment measures could mean that Tuesday’s Eurozone inflation data ultimately goes overlooked by investors and the single currency.
Tuesday’s Eurozone inflation figures are the highlight of the European calendar for the week ahead, while there’s little by way of major economic numbers due out of the UK.