The pound sterling forecast struggled yesterday and into today owing to the continued uncertainty of a no-deal Brexit. The outlook for the UK-EU negotiations has not been particularly favourable with lots of reports suggesting that the two sides are very far apart.
Sterling fell yesterday as this news began to weigh on the pound, following comments from Andrew Bailey that he had warned Bank bosses in the UK to prepare for a no-deal exit, as reported by the Times today. Bailey is Governor of the Bank of England (BoE) and if he is concerned that the market will be taking notice.
June is a key month and we are getting closer and closer to the EU Summit from the 18th and 19th where we could easily see increased volatility as talks begin to possibly intensify. The end of June is a deadline for any extension to be agreed to the December 31st transitional phase which is when the UK will have to have some trading arrangements in place with the EU, or will be into a no-deal scenario.
UK Services Data Improves, Signs of Some Optimism?
The pound had until this news yesterday been stronger as improvements in global risk sentiment and some very tentative signs of recovery in the UK begin to alter some of the more negative pictures painted for the pound in May.
Yesterday, Services data released for the UK economy which covers about 80% of the activity in Britain, showed an improvement to 29, on a reading of 1 to 100 where anything above 50 represents expansion, and below contraction. Whilst clearly below 50 and indicative of a contraction in the sector, the previous reading of 13.8 in April shows how far forward the UK economy has come.
The UK Government has furloughed 8 million workers, many of whom are reported to be in this sector in hospitality and other services businesses which have been affected by the lockdown. Expectations for the UK economy to rebound will be shaped by these data sets and this slightly more positive news could provide direction for sterling exchange rates ahead.
Important Day in Europe – ECB Interest Rate Decision
The European Central Bank (ECB) will meet today to discuss their latest interest rate decision and monetary policy statement. The decision at 12:45 and then statement at 13:30 is a regular staple of the economic calendar and has real potential to influence Euro and GBPEUR rates.
There is mounting speculation the ECB will be embarking on yet more stimulus to try and encourage growth in the Eurozone. The Times today reports that another €500bn worth of Quantitative Easing (QE) could be announced, which could influence euro volatility.
QE is the purchasing of bonds by a Central Bank to increase liquidity in a financial system. This would show the ECB ready to act and face the challenges ahead, and combined with the recent €750bn bailout fund being announced by France and Germany, could provide yet more confidence for the euro.
There has been major criticism of European leaders that perhaps not enough was being done to look after all European nations and support them through the COVID-19 troubles. Such proactive measures could be taken positively by markets, although historically QE is seen as having potential to weaken a currency by increasing the money supply.
GPPEUR interbank levels are back below 1.12, trading at 1.1170 having hit 1.1277 at their peak this weak. This is still higher than the more recent lows of 1.1047 seen at the end of May.
Where Next for Sterling Exchange Rates?
The pound could face some increased volatility against the euro today and all eyes will surely continue to be on more global developments in the fight against the Coronavirus. Europe has eased many restrictions and it was also announced yesterday that many Brits might still be able to enjoy a summer holiday with Portugal, Spain and Italy all potential destinations as restrictions are eased for flights.
The US dollar is a barometer of risk sentiment and has been weakening lately, despite the now worldwide protests being seen. With Trump being criticised for involving the army, it makes the pending Presidential election for November all the more interesting.
The currency markets have lately become more optimistic over the global fight against the pandemic with easing of restrictions and less deaths being reported per day. However, the risk of second infection persists and we still cannot fully account for the final health and economic damage from Coronavirus.
For sterling, we can see clearly how the uncertainty over Brexit still has the potential to trigger fresh volatility and as this topic appears to become more and more important the closer we get to not only this month’s deadline but also the December one, the potential for increased sterling volatility is present.
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