Bank of England Policy Troubling Pound Sterling

Bank of England Policy Troubling Pound Sterling

Pound sterling to euro closed the day at 1.1060 yesterday, a similar level to where it began after dropping to 1.1020 at and threatening the psychological 1.10 level. Despite the low, pound to euro remained range bound during yesterday’s trading with only a 0.5 percent difference between the highest and lowest points.

However, pound to US dollar saw gains as a weaker US dollar allowed pound to US dollar to gain more than 0.5 percent, reaching 1.2531 at its highest point before consolidating just above 1.2500.

Pound to euro and pound to dollar have struggled during the past month as Brexit concerns, COVID-19 and monetary policy have all weighed on the UK currency. A key driver of the pound has been the Bank of England’s (BoE) monetary policy and market reaction to the BoE’s £100 billion of added stimulus last Thursday was one of disappointment. In the wake of the announcement, both pound to euro and pound to dollar fell by more than a cent.

Historically, quantitative easing has had a negative effect on a currency but in these unprecedented times, markets are looking for monetary decisions that encourage growth and the BoE’s response has lacked the “We’ll do whatever it takes approach” that we’ve seen with the US’s Federal Reserve. In short, the better the opportunity for growth and growth forecast, the more bullish a currency is likely to be. By comparison to the BoE, the European Central Bank recently announced further quantitative easing and improved growth prospects, which sent the euro higher on the day.

Uncertain Pound to Euro Outlook Evident in Mixed Forecasts

Pound to euro predictions have been wide ranging as economists try to get to grips with the ever changing political and economical climate. Commerzbank Bank recently forecast pound to euro would test 1.02 due to Brexit uncertainty in June but when the Brexit can was kicked firmly down the road, the short-term downside risk to pound to euro lessened significantly. In another prediction, investment bank Standard Bank recently predicted that pound to euro could reach 1.25 as a Brexit issues resolve later this year.

Now, two more banks have cited different forecasts on the short-term outlook for pound to euro. French bank Credit Agricole has said that pound to euro is undervalued and that we could see a move north to levels above 1.1500, a rate not seen since mid-April. However, analysts at Nomura Bank say otherwise, and they expect the pound to come under further selling pressure due to lower growth, decreasing yields and large double deficits. Nomura Bank is forecasting pound to euro to fall to 1.0870.

UK Economic Data Beats Forecasts

Markit Manufacturing Purchasing Manager’s Index (PMI) delivered a surprise return to growth as data showed a reading of 50.1, which represents a marginal expansion. Expectation had been for a reading of 45 following last month’s reading of 40.7, so whilst growth here was minimal, the data was encouraging.

Markit Services PMI recorded a figure of 47, which was better than economists forecast of 40 and a significant improvement on last month’s reading of 29, but this number still represents a contraction in the crucial services area, which accounts for approximately 80 percent of UK Gross Domestic Product. A figure above 50 represents expansion whereas a figure below 50 signifies a contraction.

The Composite PMI, which looks at the larger picture and combines the two data releases recorded a reading of 47.6 against a consensus of 41, a vast improvement in last month’s dismal reading of 30.

Whilst the numbers don’t signify growth, the data is encouraging and lays the foundations for a UK recovery. It appears the tide is turning, and confidence is slowly returning to businesses. In a further boost to the UK economy, Boris Johnson has announced a relaxation of lockdown measures allowing pubs, restaurants, hotels and hairdressers to return to work on 4 July. The 2-meter rule will become a 1-meter rule, welcomed news for the hospitality sector which has suffered enormously during this COVID-19 crisis. The prime minister’s changes are the most significant ones imposed since lockdown began and have been received positively by business and the public. That said, there are still certain areas of the economy that are awaiting clarification on what they can and can’t do.

The sooner the UK can return to a sense of normality, the quicker the UK economy can return to a pre-COVID-19 level but unfortunately most economists still see this taking in excess of 18 months. In the meantime, the pound could gain some support as restrictions are eased further and business returns.

Get in touch to discuss these factors in further detail, and how they could impact your upcoming currency exchange. I’ll be happy to contact you personally and discuss your requirements.