The euro to pound exchange rate is now trading roughly around 4-cents from its annual high, after breaking back above 0.90. The annual high is also the highest level the EURGBP exchange rate has traded at since the financial crisis a decade ago, and at the time of writing the pair are around 4-cents from this level of 0.9499.
What’s Causing this Sterling Weakness?
Downward pressure on the pound can be attributed to a number of factors at the moment. When the pound crashed back in March it was when the reality of the seriousness of the Coronavirus first kicked in, and Sterling along with global stock markets were all sold off dramatically. There have been a number of spikes in Coronavirus cases over the past few weeks and some experts think there could be more due to the worldwide protests supporting the BLM movement taking place recently. Texas in the US saw a spike of over 2000 new cases in one day last week, and some areas of Beijing in China have also been shut down due to another spike in reported cases. As the pound struggled during the initial wave it wouldn’t be surprising to see the it sold off again if there is another wave of new Coronavirus cases so this could potentially be a reason for the weakening value of the pound.
One of the reasons that Sterling drops during stock market selloffs and a risk off attitude is due to the high current deficit the UK has, as the nation imports more than it exports.
The pressure on UK and EU negotiators has also increased recently which could be another reason for the weakening pound. It is now public knowledge that the UK will not be requesting an extension to the transitional period for Brexit, so the official end date of the transitional period is the 31st of January 2021. Due to the negotiators on both sides being unable to make much progress due to the lockdown measures, not enough progress regarding trade deals has been made but the UK Prime Minister Boris Johnson as well as other UK ministers have confirmed that the UK will not be requesting an extension this month. June is the final chance so this could be why Sterling is softening across the board of major currencies, and why EURGBP has climbed above 0.90.
UK public finances data has also been released earlier this morning and it shows that UK debt is now larger than the size of its entire economy. This is the first time this has happened in more than 50 years and its also the largest figure on record since the records begun in 1993. It has taken place as the UK government borrowed record amounts in May to help counter the negative impact of the lockdown on the UK’s economy. Sterling exchange rates are currently in the negative for the most part as a result, and following on from the selloff yesterday afternoon after the Bank of England (BoE) meeting.
Yesterday afternoon the BoE opted to increase the amount of financial stimulus into the UK economy and keep the interest rate at 0.1%. There are 9 voting members of the Bank of England and 8 voted in favour of pumping more money into the economy to help the recovery. The amount will be £100bn of bonds, the pound fell after the announcement due to the tone used although many analysts have highlighted that the tone was more positive than the meeting in May.
EU Leaders’ Summit to Take Centre Stage Today
At the time of writing the EU summit is taking place, with much of the focus on the €750bn package that’s aimed at assisting the trading bloc in its recovery from the Coronavirus. EU stimulus packages have been in the financial media often recently as top German lawmakers have officially questioned a stimulus package introduced a few years back, and the level at which Germany is contributing. Moving forward this kind of topic could impact on the euro’s value as there appears to be infighting within the group regarding the spreading of debt repayments and the size of the contributions.
Economic data releases are light this week but next Tuesday could be a busy day for the euro as a number of key releases are due out covering the economy. Get in touch using the form below to discuss these factors and their potential impact on your upcoming currency exchange in further detail.