The pound began this week testing fresh lows against the Euro and US dollar, and has struggled to make much headway back since. The pound to euro rate has in fact touched fresh lows this morning, as well as against the Euro, Australian dollar and the New Zealand dollar.
The reasons for this sterling decline are numerous, including the worries and fears over the impact of the Coronavirus on the UK. Rishi Sunak, the British Chancellor stated that the UK is at risk of a significant recession and there is unlikely be a quick bounce back in economic activity.
Whilst thankfully the number of cases for the UK is slowing and there are some positive signals over easing of restrictions, the UK has still be one of the worst affected countries in the world, and there is much caution over the health aspects of any possible second waves of infections and the further economic malaise any future lockdowns would trigger.
On Brexit, a no-deal exit is now being widely anticipated again, the UK’s talks with the EU have not been progressing smoothly and this could see the pound entering bumpier territory again, like it has in the past.
A nail in the coffin for the pound has been this week’s talk of the UK considering negative interest rates, with Andrew Bailey, the Governor of the Bank of England discussing it openly when being questioned by MP’s. We also saw UK gilts turn negative for the first time, which means investors in UK debt are getting back less than they have invested.
This mirrors both Japan and Germany where negative returns are ensured and paints an interesting picture for the UK since for both of those countries, they are net exporters in that they maintain strong economic health through exporting more overseas than they import. This helps to keep their economies stronger, despite the negative interest rates.
For the UK however, we rely on overseas investment, and whilst a weaker pound helps to make exports less costly, it makes our imports more expensive which because we spend more on those imports than we get from the exports, leaves us worse off as a country.
Will the Pound Weaken Further?
We know the pound is very sensitive to the prospect of changes in UK interest rates and whilst this topic is being debated and given serious consideration by the Bank of England then there is real room for the pound to fall lower. Of course, any sign that perhaps this is being dismissed and is not necessary could see the pound bounce back.
The sensitivity of the pound to interest rates stems from the way a higher or lower interest rates makes a currency more or less attractive to investors. Typically speaking, a higher interest rates makes a currency stronger whilst a lower interest rates reduces its strength as investors seek other more profitable shores.
On the topic of the GBPEUR rate, we have had a stronger Euro to contend with too. The Euro has become stronger owing to the Eurozone considering a €500bn rescue package to help with the Coronavirus and assist countries in getting back on their feet.
There has been lots of criticism around the Eurozone and its lack of a more coherent response which is now finally getting some attention and could be a reason for Euro strength in the future.
On the GBPUSD rates, the update is that the Federal Reserve are not considering negative interest rates but the wider political concerns owing to the conflict with China could destabilise the US dollar, by threatening the global order.
This is also an election year and there could be more troubles ahead for both the US , and the US dollar as the world picks over the Coronavirus and reviews whether countries should and could have done things differently.
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