Pound Sterling Breaks Out Above Key 1.14 Level Against the Euro

The GBPEUR exchange rate has closed out the week with strong gains after a close at 1.395. The 1.1300 level has capped the gains in sterling since May of 2020. Brexit fear and harsh lockdowns saw sterling under pressure all year, but the pair has now broken out and looks to the test the 1.1500 level next.

GBPEUR soared on Thursday after the latest Bank of England interest rate meeting saw policymakers holding rates at record lows and failing to provide further stimulus.

BoE Sees Rapid Economic Bounce From Vaccines

The Bank of England is predicting a strong rebound for the UK economy this year as the current vaccination programme gathers pace. Economists at the bank see 4.2% drop in first quarter growth, followed by a rebound of economic activity in the second quarter. It was projected that the economy will see pre-virus economic output around March 2022.

Despite ruling out further stimulus at the current meeting, the BoE left the door open for a move if the economic outlook sours, saying:
“The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

The Threadneedle Street policymakers also clarified the bank’s stance on negative interest rates. Governor Andrew Bailey suggested high street banks should prepare for such a move by July, but stressed that this was a precaution. Bailey said the BoE, “…did not wish to send any signal that it intended to set a negative bank rate at some point in the future”.

Traders were looking for confirmation that negative rates were off the table after the signing of the Brexit agreement and this brought sterling buyers.

The BoE also said they were watching shipping prices closely as the post-EU trading arrangements get underway. The bank’s governor noted in a presentation, “We have seen some quite sharp rises and some shipping costs increase”.

He added that this was not a “Brexit story” but that the effects of the pandemic had altered trading routes and patterns.

Euro Numbers Highlight Inflation Risks

The European Central Bank was boosted by a rise in Eurozone inflation this week with the indicator jumping to 0.9% after being trapped in deflationary territory for months. This will remove the fear of a higher euro on costs for exporters and the latest bounce in the US dollar alongside the pound’s recent gains could see inflation move higher again.

The real issue for central banks in the year ahead, will be trying to contain inflation rates without raising interest rates. Government debt piles have increased with the pandemic and a rise in rates would increase their servicing cost on that debt.

Some central banks may follow Switzerland, Japan, and Sweden into negative territory this year and move to negative rates this year. There are currently 22 eurozone countries at 0% rates and the UK joins Poland and Australia at 0.1%.

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