Yesterday’s Bank of England (BoE) interest rate was eagerly anticipated by investors yesterday as there had been rumours circulating of a potential cut into negative territory in order to encourage spending to combat the economic damage caused by COVID-19. The pound to euro and pound to US dollar rate suffered significant losses throughout the day as a result. Sterling fell in value against the majority of major currencies in the build up to the announcement, recovered after the cut did not take place and then lost value again later in the days trading. This just goes to show the fragility of Sterling at present.
It was announced there would be an additional £100bln pumped into the economy via Quantitative Easing (QE). QE is essentially injecting funds into an economy in order to encourage growth, it is a questionable monetary policy and it is difficult to ascertain its impact. In some cases it seems to work in others it doesn’t. This was widely expected and did not seem to have too much of an impact. The market moves on rumour as well as fact, so the £100bln stimulus was already factored into rates to some extent before it had been confirmed by the BoE. If the stimulus had been administered as a much smaller amount or much larger amount that is when we could have potentially seen high volatility.
UK Retail sales data came in for May this morning and the data was better than expected which has caused some limited gains for the pound following it’s drop in value during yesterday’s trading.
Future BoE rate decisions will be well worth keeping an eye on as there is potential for further interest cuts form the current 0.1% level as the BoE attempt to fight against the economic carnage caused by the pandemic. If we do witness further cuts expect Sterling weakness.
Sterling may well struggle to make any significant gains without some form of clarity surrounding Brexit. The pound is not the destination of choice during times of global economic uncertainty due the huge imbalance between imports and exports. The UK would be in a difficult situation currency, even the issue of Brexit wasn’t present.
Boris Johnson has until the end of the month to call for an extension in talks past 2020. He has now announced there will be no extension which does little to help the pound. An extension would have eased investor concerns as the probability of a no deal scenario eased and the pound could have made gains.
Now Boris is applying pressure on Brussels through the time constraint, a dangerous game considering the two sides are still miles apart on two key points of contention; the Irish border and fisheries.
Let us remember when Theresa May was negotiating, some believed her negotiation skills were weak and that she lacked any backbone. Could it be the case that Brussels are simply not willing to play ball?
It is not in the interest of the EU to provide Britain with a favourable deal. If the UK were to leave the bloc in advantageous position what is to stop other EU members following suit. Italy is likely to be the first candidate. Rome has had issues with funding from the EU for years now and recently has felt hard done by when emergency funding for the pandemic was distributed. With Poland gaining a larger portion of the funds than Italy despite Italy being one of the worst effected nations.
Brussels may be trying to stave of a domino effect occurring by making it as difficult to leave the EU as possible. It seems chief negotiator, Michel Barnier has a mandate and he intends to stick to it.
At present a no deal scenario looks like a real possibility.
This is not good news for Sterling, Commerz bank for example have predicted that the GBPEUR interbank exchange rate could fall as low as 1.02. If you have a requirement selling the Pound it could prove wise to take advantage of current levels.
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