The Pound Euro exchange rate is seen trading lower on Monday 

A two Euro coin is pictured next to an English ten Pound note in an illustration

The Pound Euro (GBP/EUR) exchange rate is seen trading lower on Monday, 11th January as currency markets’ attention turns to the Bank of England and possible negative interest rates in the near-term outlook.

Sterling is currently quoted at 1.1067 ahead of the European open,

FX analysts at Goldman Sachs has confirmed this negative view on the Pound-Euro outlook.

“We are closing our trade recommendation to go short EUR/GBP at a small potential profit, but well short of our initial 0.87 target, which we had thought could be achieved once the UK and EU secured a post-Brexit trade agreement” says Zach Pandl, FX analyst at Goldman Sachs. “While the initial market reactions to Brexit developments were in line with our expectations, it appears that further appreciation pressure was stymied at least in part by resurgent Covid risks.

“Our economists remain confident that the UK will ultimately be well-placed to benefit from prolific vaccine distribution, a rebound in the outsized service sector and strong policy support, but it is also true that the Brexit deal is relatively narrow in scope and activity will continue to face a number of headwinds over the coming months.

“As a result, and with the main catalyst now behind us, we are taking a step back to reassess our Sterling views for the post-Brexit world (while leaving our GBP forecasts unchanged).”

GBP/EUR Exchange Rate Higher in Spite of Eurozone Unemployment Rate Dip

A surprise improvement in the Eurozone unemployment rate was not enough to keep the Pound to Euro (GBP/EUR) exchange rate from recovering ground ahead of the weekend.

Even though the headline unemployment rate dipped from 8.4% to 8.3% this failed to encourage any particular sense of optimism in the Eurozone’s economic outlook.

As the underlying details of the report showed a sharp monthly increase in unemployment among young people in November this highlighted the ongoing challenge facing the currency union.

The mood towards the Pound, meanwhile, generally improved in the wake of the UK’s approval of the Moderna Covid-19 vaccine.

With all three major vaccines now set for a rollout across the UK worries over the health of the economy temporarily diminished, even though the impact of lockdown is still likely to make itself felt.

Euro (EUR) Exchange Rates Vulnerable to Weaker Industrial Production Figures

The Euro could find fresh downside pressure on Monday if the Spanish industrial production data for November weakens as forecast.

Evidence that production extended its decline further could give investors further reason to bet against the single currency.

As the Eurozone economy still appears at risk of experiencing a double dip recession, with growth returning to negative territory in the fourth quarter, any underwhelming data could weigh heavily on EUR exchange rates.

The wider improvement in market risk appetite may also keep a dampener on the Euro in the days ahead, with improved Chinese inflation data having the potential to drive a fresh bout of risk-on trading.

If Wednesday’s Eurozone industrial production data also shows a negative reading this could see the GBP/EUR exchange rate extending its gains further.

Underwhelming UK Gross Domestic Product Set to Weigh on Pound Sterling (GBP)

Support for the Pound could falter on Friday, though, with the release of the latest batch of UK production, trade and growth data.

Particular attention looks likely to fall on the latest gross domestic product report, with forecasts pointing towards a sharp monthly contraction in November.

If the economy delivers a major slowdown on the month, reflecting the impact of the second national lockdown, optimism over the economic outlook looks set to diminish.

On the other hand, any signs of resilience in the industrial and manufacturing production figures may help to keep a floor under GBP/EUR exchange rates.

As long as the manufacturing sector appears on track to hold onto its relative strength in the fourth quarter this could limit anxiety over the prospect of another quarterly growth contraction, at least for the time being.


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