EUR GBP Heads Lower After BoE Rate Hike

The EUR GBP exchange rate was lower for a seventh day after the latest BoE rate hike. The bank moved to interest rates at 0.25% with many expecting another month of inaction. The ECB failed to take action on the same day and the path ahead will support the pound sterling as the BoE takes a more hawkish stance. However, there are fears for the pound after further restrictions were touted.

The EUR v GBP was trading at 0.8510 after touching an intraday low at 0.8460.

Extra restrictions needed within days, govt scientists

Advisers to the UK government have suggested that new virus restrictions are needed imminently.

UK news outlets have detailed the new restrictions, which may be introduced after Christmas. A source said that the restrictions would be similar to the stage 2 of the Prime minister’s roadmap in April.

Another round of lockdown’s would dent the UK’s economic recovery which has been the strongest in the G7 countries and would take some of the wind out the pound’s sail after the BoE started hiking rates last week.

ING said:

“The Bank of England surprised markets for a second time, this time by hiking its key interest rate with the latest strong inflation reading tipping the balance. Balance sheet reduction is on the cards after one more hike. Our economics team thinks this will only take place at the May meeting…”

One support for the pound is that Europe is also facing lockdowns with the Netherlands becoming the first to implement a full lockdown at the weekend. The news was announced on Saturday with the lockdown starting today.

Full lockdown would hurt UK economy, back below pre-virus level

Closing down the retail, leisure and hospitality sectors again will cause the British economy to shrink to 6% below its pre-pandemic levels, according to Pantheon Macroeconomics.

The UK economy is dominated by the services economy at 80% and it has been the cause of some eye-wateringly bad GDP figures after lockdowns.

“In a plausible worst-case scenario, in which retail and consumer services businesses are forced to close again, GDP would revert to being about 6% below its January 2020 level while the restrictions were in place,” Samuel Tombs, chief economist at Pantheon, said.

The Confederation of British Industry also warned the government needs to end working from home guidance as soon as possible to prevent unnecessary economic scarring.

Tony Danker, director general of the CBI, said using working from home “as a go-to Covid secure measure brings significant economic cost with it”.

“Some economic activity is displaced to local areas, but it also leaves our town and city centres under real strain for retailers and hospitality. Working from home in practice meaningfully restricts trade for some businesses and impacts mental health too,” he added.

We are likely to know more about the government’s plans early in the week and that will dominate the EUR v GBP rate now that the central banks have shown their hand on inflation.

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