“As the eurozone economy shows a perceptible reaffirmation in growth in the coming months, we expect the European Central Bank to finally do the same by announcing a slower pace of its bond purchases starting in the fourth quarter of 2021 in its September meeting, ”Well Fargo analysts say. They note that the UK’s faster economic rebound and the earlier move towards less accommodative monetary policy suggests higher risk to the upside for its GBP / USD medium-term target of 1.4900 than its EUR / USD target of 1.28. In the short term, they anticipate that the pound will perform more strongly against the dollar, “although the euro may catch up a bit in the long term as the economic recovery in the euro zone gains more momentum.”
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“The eurozone economy is also recovering, but the upturn in activity appears to be more measured. In part, this reflects a slower start by many euro zone governments in vaccinating their populations against COVID. This resulted in the lockdowns remaining in effect in April in some euro zone countries, and other restrictions, in some cases, were implemented later. “
“The Eurozone retail sales level in April was just 0.3% above the first quarter average, a stark contrast to the much higher gain reported for the UK. We also note that the first quarter GDP level of the euro zone was still 5.1% below its pre-pandemic spike in the fourth quarter of 2019. “
“While things have improved since then for the euro zone, with the recovery gaining some momentum, this issue of the euro zone recovery, but at a slower pace, is also reflected in the confidence polls. In particular, the UK services PMI rose to 62.9, a multi-decade high. The Eurozone May services PMI increased, but not by as much to 55.2, the highest level since June 2018. “
“The divergent trajectories of monetary policy have led to slightly divergent outlooks for the British pound and the euro. As monetary policy becomes less accommodative in the UK, we expect the pound to rebound and the risks around our forecast tip to the upside. As for the euro, although we forecast a stronger currency, the rate of appreciation is likely to be more gradual, as the ECB may be more cautious in reducing monetary policy accommodation in the near future ”.
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