Euro in ‘freefall’ as lockdown fears push the pound to strongest levels since early 2020

Russia 'took advantage' of Europe's energy issues says expert

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The pound has now climbed to its highest level against the euro since early 2020, trading at €1.19. Sterling has gradually been gaining on the euro for a while, with a range of factors further accelerating the exchange rate. Head of Market Intelligence at Caxton Business Michael Brown told “What we see is a combination of the worsening covid situation on the continent causing sentiment to sour rather significantly, coupled with both the Bank of England and Federal Reserve making increasingly hawkish noises, thus widening the policy differential between the eurozone and its peers. Couple these together and you end up with incredibly strong headwinds, and a euro in ‘freefall mode’.”

There has been a notable divergence in direction between the Bank of England and the European Central Bank (ECB) over whether or not to use a rise in interest rates to control inflation which has grown considerably in both the UK and EU.

Despite leaving interest rates unchanged earlier this month the Bank of England has continued to hint that a rate rise will come in the near future.

On Friday the Bank’s chief economist Huw Pill told a conference in Bristol: “I’m looking perhaps for reasons not to hike rates.”

Over the weekend Bank of England Governor Andrew Bailey told the Sunday Times the Bank would have to raise interest rates if the economy evolved as expected.

Frédérique Carrier, Head of Investment Strategy at RBC Wealth Management, said markets expected the Bank of England to be one of the most “proactive” central banks in raising rates, along with the Bank of Canada.

The European Central Bank meanwhile has remained more dismissive of any potential rate rise with Mr Carrier predicting it would be unlikely to act before 2023.

On Friday ECB President Christine Lagarde said: “”Conditions to raise rates are very unlikely to be satisfied next year.”

Both central banks will next review interest rates on the 16th December.

John Hardy, Head of FX Strategy at Saxo Bank described the ECB as a “stick in the mud” noting that the re-nomination of Jerome Powell as chair of US central bank the Federal Reserve also highlighted the differences between the ECB and other central banks.

Mr Powell was widely seen as more likely to support an interest rate rise than rival Lael Brainard.

Speaking to Mr Hardy also cited the natural gas crisis in Europe as well as the news of a new Covid lockdown in Austria as key reasons for the recent decline in the Euro.

Meanwhile consumer confidence in the Eurozone fell by two points in November, down to -6.8.

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This was ahead of expectations with economists polled by Reuters predicting it would only fall to -5.5.

The index, based off consumer survey data from 26 EU countries, has now shown two months of decline with the results suggesting growing concern from households over the bloc’s economic outlook.

Last week consumer confidence in the UK was found to be growing with the GFK Consumer Confidence Index finding a seven-point jump in major purchase intentions.

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