The pound found some support last week following losses of 2.5 percent against most major currencies in the week before. The pound to euro and pound to dollar rate remained largely rangebound throughout with both currency pairs closing the week at similar rates to where they began.
Following the Bank Holiday weekend, this week will be a short one, and sterling has started the day slightly higher with pound to euro trading at 1.1211 and pound to dollar trading at 1.2262.
However, despite some respite for the pound last week, the outlook for the UK currency is bleak. Since the start of COVID-19, sterling has muddled through but the last few weeks have seen investors pay significantly more attention to UK specific issues and they have not liked what they’ve seen.
Sterling is facing a raft of obstacles and it’s increasingly difficult to see how any currency with such a negative outlook can go anywhere but down.
Firstly, the Bank of England has been particularly gloomy in its response to the economic challenges caused by COVID-19 crisis and is considering lowering interest rates from 0.1 to 0 percent or lower. Both BoE Governor Andrew Bailey and BoE Chief Economist Andy Haldane have suggested that the bank may consider negative interest rates, which has sent the pound lower. In addition, the bank is likely to increase its quantitative easing programme at June’s meeting. The BoE’s asset buying programme currently stands at £645 billion following the emergency purchase of an extra £200 billion in March. Two of the nine members of the BoE’s Monetary Policy Committee voted to increase QE at May’s MPC meeting and it is thought this number will increase to a majority at the meeting on 18 June.
Slow COVID-19 Response Keeps the Pound Under Pressure
The UK’s slow response to exit the lockdown is also adding to sterling’s woes. In Europe, many countries have eased lockdown measures considerably and whilst maintaining social distancing, have been returning to a more normal way of living. By comparison, the UK government’s message has left much of the public confused and businesses unable to plan for the future. Whilst Chancellor Rishi Sunak’s Furlough scheme may have prevented a sharp rise unemployment in the short-term, there’s no doubt that the longer the lockdown continues, the greater the unemployment will be in the months to come as more businesses run out of cash and go to the wall.
It is long-term damage to the economy that concerns investors. The UK had hoped for a quick bounce back to a pre COVID-19 GDP level, but this now seems highly unlikely. Instead, the UK’s economic recovery will likely be slow with the UK not expected to return to a pre COVID-19 level until 2022. This makes the UK less attractive to overseas investors, thus less money is invested in the UK, and in turn weakening the UK currency.
Cliff-edge Brexit Remains Greatest Threat to Sterling Outlook
The COVID-19 crisis is having a devastating impact on the UK economy although the biggest threat to the pound to euro and the pound to dollar exchange rates in the short-term remains the Brexit trade negotiations.
The penultimate round of Brexit trade talks begins next week with the European Council meeting on 19 June. The UK and EU have one last chance to find progress in what so far has proved to be a gridlocked negotiation. Neither the UK nor EU has given up any ground on their red lines and if both camps stick to the same agenda, it is difficult to see how trade negotiations can advance.
The UK will then be faced with the decision of whether to request an extension to the current transition term, which is due to end on 31 January 2021. The UK government has always stated that it would not request an extension to the current extension so if they stick to their word and trade talks show no sign of progress, sterling could tumble fast as the prospect of the UK leaving the EU without a deal heightens significantly.
Technically, the UK has until late November to strike a deal with the EU, but UK prime minister Boris Johnson has threatened to walk away from negotiations in June if there is no sign of a deal in sight and prepare for a no-deal Brexit.
Sterling will certainly be in the spotlight over the next few weeks with so many UK specific events to keep track on. Given the above, the outlook for the pound looks miserable and it’s no wonder banks such as Barclays, Commerzbank and Danske Bank all see pound to euro weakness over the coming weeks.