The UK primed itself for the start of its official Brexit negotiations with the EU on Monday morning. The pound was to be undermined by the no-deal Brexit jitters which saw a spike last week following the UK’s statement in their Brexit mandate release. The UK government noted that they would not be willing to conform to EU rules and regulations post-Brexit, which is exactly what the EU had highlighted in their own mandate two days prior. As a result, investors noted that a rise in tensions between the two was likely to arise throughout the week, which the market has noted will only complicate the process of obtaining a trade deal which both parties agree on in the next few months.
The British pound came under sustained selling pressure at the start of the week as markets repriced GBP amid the coronavirus fears and expectations of a volatile EU-UK trade negotiation as the talks got underway Monday morning. The market noted that GBP relies heavily on a steady stream of external finance to maintain its value – something which will be knocked by rising risk aversion. The Sterling’s downtrend looked to continue as the GBP begun to react negatively to bouts of market fear over the coronavirus, which knocked the currency off course of its previous 2020 highs.
Heading into mid-week, BoE interest rates were being eyed-up for the near-term and investors grew increasingly concerned for the pound Sterling. Despite the promise of a brighter future for business from the UK government after their landslide victory in the December election, the GBP was sat at the lowest level it saw for months. This came after fears of the coronavirus skyrocketed, causing anxiousness in GBP investors.
Sterling relies heavily on substantial inflows of global investor capital, which is set to be put at risk should the global growth rate take a hit. Whilst the UK economy might be immune to the economic contagion of the COVID-19 virus, the currency is not. Should these inflows dry up, for instance when investors are running scared of a virus outbreak – the pound Sterling has been identified as one of the most vulnerable global currencies. As a result of the heightened fears and weakness in the currency, the Bank of England’s interest rate cut odds have spiked over the week.
Into the end of the trading week, Bank of England Governor Andrew Bailey said action could be needed to offset the effects of the coronavirus crisis, this has tipped markets that the UK could well be priming for an interest rate cut at their next policy meeting on March 26.
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