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Lockdown fears shaking currencies

22 Nov 2021

Currency traders are cautious of the British Pound’s performance despite recently going over 20-month highs against the Euro. Uncertainty comes due to a growing gap between Bank of England and European Central Bank monetary policy outlooks.

At the start of the week, the GBP/EUR is being supported near 1.1838 and1.1783, meeting resistance at GBP/EUR supported near 1.1838 & 1.1783. Amid concerns, the GBP remains to be the as the best performing major currency for the latest five-day period and has also managed get the better of a strong Dollar. Only one other major currency was able to do the same.
Zach Pandl, co-head of global foreign exchange strategy at Goldman Sachs noted, Europe-specific factors likely explain the single currency’s weakness against the broader range of crosses. In particular, surging Covid cases have resulted in a new lockdown in Austria and the prospect of activity curbs in other continental economies. For the most part the message from ECB officials has also been steadfastly dovish.”

Moreover, there are fears amid the Euro to Dollar exchange rate as it risks further losses. The pair may fall under the 1.10 handle if indications keep leading to another European winter lockdown. “The combination of a very dovish ECB and now the possibility that economic activity is suppressed due to restrictions poses clear downside risks to the EUR toward 1.10/11.” 

Pandl added, “Unless next week’s flash PMIs surprise significantly to the upside we would expect markets to remain focused on downside risks to Euro Area activity. We think EUR/USD can fall below current spot over a shorter horizon, but we would expect a rebound thereafter under our baseline forecasts for growth and policy on both sides of the Atlantic.”

On the other hand, the GBP/CAD exchange rate is consolidating a two-month run of losses. At the time of writing, the pair trades at 1.6912. “Given the possibility that more virus lockdowns are announced in the coming days and weeks, risk-sensitive currencies like the CAD may trade on the defensive while declining oil prices exert an additional drag,” traders said.