Today is another Super Thursday with potential volatility for the pound with two main events – The Bank of England Meeting and the EU summit. The Bank of England are widely expected to increase the level of quantitative easing when the central banks’ policymakers meet at lunch time today. Those with pressing requirements would be wise to pay close attention as a strong market reaction could be seen on the back of any new developments. The general forecast is for further stimulus of £100 billion but there are some market commentators that are pointing towards £150 billion. In normal times a further injection of stimulus via quantitative easing normally sends the pound dropping. There could be some interesting movement for pound to Euro and pound to dollar.
As always, the market reaction depends on how much the markets have already priced in the change. In these times though when the economy has crashed, with a severe recession in the making, any assistance from the central bank could be seen as positive. Any further guidance in the minutes and subsequent press conference could cause added volatility for the pound today. Any suggestion for example of further stimulus for example could have additional impact on GBP.
UK Gross Domestic Product fell to a record low of 20.4% in April highlighting how destructive the coronavirus has been to the UK economy. The growth numbers were three times as bad as the March numbers which saw a fall of 5.8%, the month that Britain entered lockdown. The weak data is almost certainly going to be considered at today’s meeting as will the inflation data that was released yesterday. Inflation for May arrived at just 0.5% and gives extra reasoning for the MPC to opt for more stimulus. The level of unemployment is also expected to climb to levels not seen since the 1980’s and this too will be something the Bank of England will be acutely aware of. Data from Tuesday saw unemployment climbing and jobless benefit claims rising rapidly. Jobless claims rose last month by 23% to 2.8 million. Whilst the British government has provided a very well received job retention scheme there has nonetheless been a huge number of furloughed workers. If some of these works don’t end up returning to work when the government scheme comes to an end there could be rough waters ahead in the labour market and this is when the extent of the crisis may show itself.
How Will the Pound React to the EU Summit – GBP EUR
The hugely important EU summit commences today and runs through until tomorrow with Brexit on the agenda. There could be high volatility for GBP EUR in particular. There have been mixed signals from different politicians and leaders over the last week and any statements are likely to help direct the price of sterling. Brexit has once again become very topical in recent weeks. The contentious issues of fisheries is also likely to make the headlines in both the UK and the EU as both sides try to gain a political win in this politically charged battle. It is interesting considering that the fisheries industry represents just 2% of UK GDP. It was a major battle ground during the EU referendum in June 2016 which is why it has become so political.
UK Prime Minister Boris Johnson signalled this week that he felt a deal would be reached by December but was hopeful one might be reached in July. The UK and EU are about to embark on serious discussions throughout July and any developments are likely to carry huge weight for the value of sterling. Once again, the prospect of a deal or no deal Brexit is one of the single biggest drivers for sterling exchange rates.
Yesterday it was reported that Germany is telling EU member states to stand firm in unity on British demands and crucially to prepare for a no deal Brexit. The rhetoric does not make the negotiations any easier which are expected to intensify at the end of this month into July. It has been almost four years since the EU 2016 referendum and the final date by which a deal can be reached is fast approaching. Once again there is potentially another cliff edge moment as both sides seek to push the negotiations to the wire to secure the best deal for the relevant side.
There was some good news in the UK after a new drug which has been produced in the UK for the last 60 years has been confirmed as being able to reduce the death rate in Coronavirus patients with severe symptoms. Whilst it is not cure it is step in the right direction whilst the world tries to find a vaccine for this virus. Any developments to further treat COVID-19 or the announcement of an eventual vaccine could see substantial volatility for sterling exchange rates especially if there is sudden improvement in the global outlook.
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