Euro slides as Austria’s fourth national COVID-19 lockdown begins

The euro fell on Monday to trade close to a 16-month low on growing concerns over the impact of new COVID-19 restrictions in Europe, with Austria starting a full lockdown and Germany considering following suit.

Austria began its fourth lockdown, the first introduced since vaccines became widely available, shutting Christmas markets, bars, cafes and theatres.

A fourth wave of infections has plunged Germany, Europes largest economy, into a national emergency, Health Minister Jens Spahn said, warning that vaccinations alone will not cut case numbers.

The euro slipped 0.25% to $1.122 at 0905 GMT, close to a 16-month low touched on Friday when Austria announced the lockdown.

“Pandemic-related risk premia have made an unwelcome return to European FX markets and may keep the Euro vulnerable this week,” Chris Turner, global head of markets at ING, told clients.

New lockdowns and pressure on the service sector in Europe now provide the European Central Bank with many more reasons to go slow on tightening its policy, Turner added.

Versus sterling, the euro edged 0.1% higher at 83.95 pence, after it touched it lowest level against the UK currency since February 2020 as the market weighed Bank of England Governor Andrew Baileys cautious comments on inflation over the weekend.

Markets expect the BoE to become the first major central bank to raise rates since the start of the pandemic in a bid to tackle inflation that hit a 10-year high as household energy bills rocket.

In the meantime, the dollar got additional support from bullish comments by Federal Reserve officials Richard Clarida and Christopher Waller on Friday who suggested a faster pace of stimulus tapering may be appropriate amid a quickening recovery and heated inflation.

The dollar index, which gauges the currency against six major peers, traded little changed at 96.141, staying within sight of last weeks 16-month high of 96.266.

A more rapid end to tapering raised the possibility of earlier interest rate increases too.

The minutes of the Federal Open Market Committees meeting at the start of this month, when policymakers announced a start to tapering, are due Wednesday. They may provide more insight on how many Fed officials are considering faster tapering or earlier rate increases.

U.S. President Joe Biden is also likely to announce his nominee for Fed chair this week, after interviewing incumbent Jerome Powell and Fed governor Lael Brainard.

(Reporting by Joice Alves, Kevin Buckland; Editing by Shri Navaratnam, Ana Nicolaci da Costa and Philippa Fletcher)