Pound to Euro Falls Despite BoE Distancing From Negative Interest Rates

GBP AUD Lower After the Latest UK Inflation Figures 

Pound to euro fell 0.25 percent during yesterday’s trading despite Bank of England governor Andrew Bailey distancing the bank from any short-term action in relation to negative interest rates. The pound to euro exchange rate had weakened following last week’s Monetary Policy Committee meeting in which the bank confirmed negative interest rates were still a monetary option that were being considered. This instantly led the market to begin pricing in a rate cut for Q1 next year but yesterday Bailey said that negative interest rates had been a mixed bag for other states that had used them. Bailey also said there could be confusion if there was no clear communication. It is only right that the bank considers and assesses all available monetary options and just because the option of zero or negative interest rates is being assessed, this does not mean the bank will necessarily take that path.

In fact, Governor Bailey and his colleagues have pointed towards more quantitative easing if more stimulus is required. For now, though, the UK economy is bouncing back and the v-shaped recovery that many had hoped for appears to be intact. However, with the prospect of a second wave of coronavirus and the UK government’s almost hysterical response, the economic recovery could come under pressure, particularly when you consider Chancellor Rishi Sunak’s Furlough scheme is due to end next month. The Furlough scheme was designed to provide financial support to employees and prevent mass redundancies, and has been successful, although cannot go on forever and so therefore, as of next month many will find themselves out of work as employers cut costs in a bid to cope with the recession.

As the government announced a new wave of lockdown measures yesterday afternoon, the pound to euro exchange rate fell. Growing concern over an increase in coronavirus infections has led the government to place several restrictions on both the public and businesses, which are expected to slow the growth of the recovery.

Markets Beginning to Price in No-deal Brexit

The ongoing Brexit negotiations will remain key to the pound to euro exchange rate direction. The recent Internal Market Bill proposed by Boris Johnson left a bad taste with the EU and the EU has threatened to walk away from negotiations if the UK continues with the bill. The UK and EU remain locked over two key issues, the first being access to UK fishing waters for EU states and the second being that of the EU’s request for a level playing field, more specifically state aid.

Michel Barnier is in London this week although the next round of talks will commence next week. This round of talks will be crucial if the UK and EU are to reach agreement before the October 15th deadline that Boris Johnson has set. Whilst the controversial Internal Market Bill overshadowed the last round of talks, officials reported a surprised advance in some areas of the negotiations behind the scenes. Although, there is still no sign of a significant breakthrough.

The Telegraph has reported that EU diplomats have suggested the EU could accept less strict level playing field assurances if the UK agreed to a more comprehensive governance structure. The EU is keen for all aspects of the deal, including fishing, to fall under one governance but the UK is conscious the EU could leverage parts of the agreement to benefit themselves in other areas. Brussels has indicated any treaty may not have to be subject to the European Court of Justice as a dispute resolution, softening their original position.

The main area of difference is still the area of a level playing field and the UK’s unwillingness to sign up to the EU’s requests on state aid, tax, labour, and environmental standards. The UK is still insisting that to compromise here would be to compromise the UK’s position as a sovereign nation.

Markets are looking for the UK to stay closely aligned to the EU and if a breakthrough can be found, pound to euro could surge by 5-10 percent over the coming months. However, whilst the threat of no-deal remains, pound to euro is likely to come under further selling pressure and if it seems a deal cannot be reached, pound to euro could target parity. Either way, the next few weeks will likely be full of twists and turns as the UK and EU grapple to get the upper hand in the talks in the final furlong. As such, the pound to euro exchange rate will likely be volatile moving higher on positive Brexit sentiment and lower on a more negative tone.