Pound to Euro: BoE Consider Negative Interest Rates

Pound to Euro: BoE Consider Negative Interest Rates

There is no shortage of events to move the pound to euro exchange rate at present and the last 24 hours has seen some key events. Most notably the Bank of England has indicated it is ‘exploring’ further the possibility of negative interest rates with the FT considering much of 2021 will see UK interest rates at -0.1%.

There was also the potential for more Quantitative Easing (QE) predicted for November, and with the R rate of infection rising in the UK to 1.7 according to new reports, the UK could be well on its way to a second lockdown.

In some more positive news, UK Retail Sales were announced slightly better than expected reflecting 0.8% growth in August, perhaps as part of the Eat out to Help out scheme. Whilst on the face of it good news, there has been many negative headlines surrounding job losses and John Lewis announced it will be cutting its bonus for partners for the first time in its history.

Sterling is actually finishing this week higher than where it started, perhaps in part a reflection of the wider moves on the US dollar we have seen this week where the US Federal Reserve opted to keep interest rates on hold until 2023.

The pound reached a high on the interbank rate of 1.1008 against the Euro yesterday but is currently in the lower 1.09’s as the market takes stock of the potential for more monetary easing and negative rates ahead.

Despite the fall in the value of the pound we are still above the lows on GBPEUR of 1.0767 seen last week, meaning a £200,000 purchase of Euros will buy you €3200 more than last week, and €8000 more than the March interbank lows when we hit 1.0533 on the interbank rate.

The Bank of England have three key factors driving policy decisions at present, which are the outcome of trade negotiations with the EU, the end of the furlough scheme in October and the economic outlook for the UK because of Coronavirus.

With such uncertainty presented by these outcomes, the Bank is preparing to unleash some extra ammunition in the form of the negative rates, any confirmation or deviation from this outlook may well provide further cause for volatility for the pound.

What Next for the Pound and Brexit?

The pound is ending this week higher against many currencies following the news on Wednesday that Boris Johnson will be giving MP’s a final say on the amendment to Internal Market Bill which could potentially see parts of the Withdrawal Agreement being overruled.

However, there are some big challenges ahead with a deal on Brexit still to be finalised and despite some optimism, there is still a large expectation of no-deal being mooted. Societe General have been quoted as saying there is an 80% chance of no-deal, whilst Goldman Sachs think there is a 45% chance. Goldman also think that on a disorderly no-deal Brexit the pound to Euro rate will hit parity.

A more positive outlook comes from BNP Paribas who have predicted that the pound to Euro rate may reach 1.15 if a deal is reached. With the current level at 1.0935, this means we could be seeing some large swings in either direction depending on how the news comes out in the coming weeks.

Of real note will be the outlook from the October EU Summit on the 15th and 16th next month, which will provide an opportunity for a deal to be discussed and arranged. So far, the UK government seems to be sticking to its desire for a free trade arrangement or a no-deal, whilst the EU are clear that they must also agree certain points. Ursula Von Der Leyen, President of the EU Commission stated only yesterday that she thinks a deal is possible.

All in all, sterling has some big challenges and questions ahead, the potential for more volatility is high as we get to crunch points on Brexit and the currency market navigates the UK’s recent rise in Coronavirus cases.

The Coronavirus has made the currency markets even more unpredictable and volatile in many respects, and we can help share with you the latest news and provide tools to help provide you make an informed decision and strategy on your transfer.

If you would like to discuss the markets in more detail, please do contact me directly using the form below.