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Euro Punished on Austrian Lockdown News & Fears Germany will Follow

Austria lockdown

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Lockdowns in major European economies were put back on the table following a decision by Austria to reimpose a full lockdown, news that jolted the Euro and other major currencies ahead of the weekend.

With Covid cases surging across Europe there is a growing expectation amongst market participants that other major country's will follow Austria's precedent, with Germany looking particularly prone to such a decision.

Austria's Chancellor Alexander Schallenberg told a news conference on Friday the country would go back into full lockdown as of Monday.

The decision comes amidst surging cases in a country where 65% of the population are fully vaccinated against Covid.

"Austria’s announcement that it is entering a full lockdown might have dented the mood... It comes hours after Germany announced new restrictions for unvaccinated people as virus cases surge in many parts of Europe," says Raffi Boyadjian, Lead Investment Analyst at

The national lockdown is set to last three weeks but will be reviewed after 10 days.

Eurozone covid cases soar

The developments are significant as it points to a sharp slowdown in Eurozone economic activity over coming weeks, making for another 'lost' Christmas a time that is a traditional driver of heightened service sector activity.

The foreign exchange market response is 'textbook' in that the safe-haven grouping of the Yen, Franc and U.S. Dollar being bid.

The Pound to Dollar exchange rate is down two-thirds of a percent at 1.3421, the Pound to Yen is down 0.84% at 152.96 while the Pound to Franc rate was down half a percent at 1.2442.

We would typically expect the Pound to Euro exchange rate to be suffering sizeable losses but given the Eurozone's single currency is at the centre of the storm it is perhaps understandable that the pair is holding recent gains close to the 1.19 level.

"FX trading developed according to an old-school risk-off script," says Mathias Van der Jeugt, an analyst at KBC Markets. "Especially the comments from German health minister Jens Spahn pushed the euro off a cliff."

German health minister Jens Spahn said on Friday - when a further 52,970 coronavirus cases and 201 deaths were reported - the country was now in a "national emergency".

"We are now in a situation - even if this produces a news alert - where we can’t rule anything out,” said Spahn.

Pound against the Euro and Dollar

Above: GBP/USD (top) and GBP/EUR (bottom).

  • Reference rates at publication:
    Pound to Euro: 1.1892 \ Pound to Dollar: 1.3462
  • High street bank rates (indicative): 1.1660 \ 1.3185
  • Payment specialist rates (indicative: 1.1833 \ 1.3395
  • Find out about specialist rates, here
  • Or, set up an exchange rate alert, here

"A further acceleration in cases across Europe over the coming weeks would likely raise expectations for further underperformance of the Eurozone economy relative to the US and put downward pressure on EUR/USD," says Matthew Hornbach, a global macro strategist at Morgan Stanley.

Gold was in demand while travel related stocks took a hit, but it is the Yen that looks to be the start on global FX markets.

"Yen is fast becoming the go to risk aversion currency of choice, taking over the mantra from the USD. Throughout much of pandemic USD was deemed as go to risk aversion currency in fx," says dealer Neil Jones at Mizuho Bank in London.

Jones says he believes the Yen will be the 'go to' safe haven in 2022, surpassing the Dollar.

He says that the USD/JPY dropped nearly 50 points on the Euro lock down news, "speaks volumes."

"With Covid cases turning upwards across the likes of Germany, France, and Portugal, there is a fear that today’s announcement is indicative of where other European nations could find themselves in 2-3 weeks' time," says Joshua Mahony, Senior Market Analyst at IG.

Eyes are on Germany where authorities are moving to impose restrictions following a sharp surge in Covid cases.

Germany recorded 65k cases yesterday and cases are doubling every 12 days at current rates.

Authorities on Thursday announced new restrictions for offices and public transport for those unvaccinated, following a vote from the Bundesrat.

The door to Austria-style restrictions was left ajar by a key of public health specialist.

“The urgent wave that we’re in right now will not be stopped by vaccinations,” since it takes weeks for people to build up full protection," said Michael Meyer-Hermann, at the Helmholtz Center for Infection Research in Braunschweig.

"We need to keep other measures front and center and put them immediately into place," he adds.

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"The pandemic, which has returned with a vengeance, not only clouds the economic outlook for the winter half-year, but also permanently changes the economy and politics," says Dr. Jörg Krämer, Chief Economist at Commerzbank.

Commerzbank economists say there will be a lasting shift in consumer habits and companies are fundamentally rebuilding their supply chains.

The European Central Bank will meanwhile likely double down on its communication that it will keep monetary policy as loose as possible in light of building economic headwinds.

For the Euro, this is a disadvantage against the currencies belonging to central banks that would be inclined to raise interest rates.

Commerzbank says the ECB will likely end its Covid emergency bond buying programme (PEPP) in early 2022 but will just shift purchases onto its longer running quantitative easing programme (APP).

"The shifting economic risk profile could quickly change what markets expect from the ECB at its December policy meeting. Suddenly, the ECB may have strong justification for maintaining a more dovish stance through a larger or longer APP program," says Derek Halpenny, Head of Research at MUFG.

ECB President Christine Lagarde emphasised her reticence on scaling back quantitative easing and preparing for rate hikes on Friday, saying recent price rises "are unwelcome and painful," but "factors driving higher prices are likely to fade.

"We should not withdraw policy support too soon," she said.

"The euro slumped the most, plummeting back below $1.13 after ECB President Christine Lagarde once again warned against premature tightening in comments earlier today," says Boyadjian.

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