Sterling has been coming under pressure for a couple of weeks now, with the pound to euro exchange rate accelerating its losses over the past few days. After spending much of April and early May range bound between 1.1350 to 1.1500, the rate has slid recently and its currently just over 1.11 as the Pound has lost value on almost a daily basis recently.
These falls can be attributed to the reality settling in regarding the Brexit, as this issue has been cast aside for the past few months as the Coronavirus has affected everyone. Now that there are green shoots and signs that economies are re-opening, the subject of Brexit is resurfacing and causing concern for the UK economy moving forward. The UK will already be having to deal with the slowdown caused by the COVID-19 virus and when an untidy exit from the EU is thrown into the mix it could pose problems for the UK in the upcoming months and years and this is perhaps why the pound is weakening.
UK Government Bonds Selling at a Loss
There have also been talks of negative interest rates becoming a possibility, which would be a first from the Bank of England GILT’s, these are government backed bonds, which were selling at a loss yesterday for the first time on record. It was the 3-year bond that sold at a loss which means that those that bought the bonds are guaranteed a small loss if they hold onto the bonds until expiry.
Government debt selling at a loss inevitably makes it unattractive which is why talks of negative interest rates have hit the financial headlines. Treasury Select Committee Governor Bailey yesterday declined to rule out the possibility of negative interest rates which has added fuel to the speculation.
The next key level of support for the GBPEUR pair to break below would be 1.1000 but they must break below 1.1100 before testing that benchmark, and don’t forget that earlier this year we saw the pair drop as low as 1.05 when the panic regarding the lockdown first kicked in back in March. Prior to that sell-off the lowest the pair had traded was around the 1.08 mark and this was when Boris Johnson became Prime Minister and outlined the possibility of a no-deal Brexit so should the chances increase once again we could see similar price movements.
Whilst the pound has been declining, we have seen the euro gain in value both against the pound and the US dollar which has not helped the pound defend itself from the almost daily losses against the euro. Recent reports regarding the Eurozone’s current account health have helped to prop up the single currency and most likely will continue to do so during these difficult times. Eurozone current account surplus amounted to €27bn for March while the 12-month surplus amounted to €338bn and 2.8% of Gross Domestic Product.
Economic data due out of the Eurozone is light between now and the end of the week, although tomorrow there will be an European Central Bank Monetary Policy Accounts meeting which could potentially impact EUR exchange rates depending on what is said.
With regards to the UK, data is also relatively light although at the earlier than usual time of 06.00 tomorrow morning there will be releases for UK Retail Sales and a Public Sector Net Borrowing data release and as both cover April (a time of lockdown in the UK) we could see some market movements.
Economic data has been weak across the board of major economies due to the lockdown, so weak data hasn’t impacted currency values drastically, as the poor figures have been expected. We could see the UK begin to see the weak data impact Sterling exchange rates as the UK also has Brexit to deal with which could add fuel to the fire. Both UK and EU negotiators had hoped for progress to have been made by June but with both parties unable to meet formally there has been a slowdown in talks which hasn’t helped. At the same time key figures such as UK PM Boris Johnson and the EU’s chief negotiator Michel Barnier have both predicted that the UK will leave the EU on the current deadline of the 31st of January 2021 so it could be a busy time for GBP exchange rates in the 2nd half of this year.
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