European elections to drive GBP

Following a week of turmoil in the markets, The  Bank of England (BoE) confirmed on Monday that it would take all necessary steps to maintain market stability. The BoE said it was “assessing the potential impacts on the global and UK economies, and financial systems”. In the run up to the UK’s March Brexit deadline last year, the BoE looked at measures whereby it lends currencies to financial institutions in difficult times when inter-bank lending is short, in order to protect financial and monetary stability. It is measures like this that the BoE is now considering again.

However, the key to sterling’s recent downfall lies at the heart of the UK-EU Brexit trade negotiations.

With both the UK and EU setting out their red lines last week, it is difficult to see a middle ground, and so the prospect of the UK-EU trading on WTO (World Trade Organisation) terms has increased, heaping pressure on the UK currency. Whilst there is an opportunity to extend the transition period, this must be confirmed and agreed by the 30th June, although UK Prime Minister Johnson has repeatedly ruled out any extension to the current deadline. Several EU diplomats now suspect trade talks could break down before June if neither party is prepared to move on their red lines.
Today sees the release of Markit Services Purchasing Manager's Index PMI for February and Bank of England member, Dr Ben Broadbent will speak tonight at 18:00, although his speech will be followed up tomorrow with BoE Governor Mark Carney’s speech at 17:00. Other economic data to be released before the weekend includes British Banker's Association (BBA) Mortgage Approvals, Halifax House Prices and Consumer Inflation Expectations.

EU Leaders Debate Coronavirus

Coronavirus' Toll on EUR increases

Eurozone prices increased at their slowest pace for 3 months as the coronavirus took its toll on energy prices and moved Eurozone inflation further away from the European Central Bank’s (ECB) target. Since, the start of the ECB’s stimulus package last September, inflation had been creeping up, albeit was still shy of the targeted 2%. The ECB has promised to maintain a loose approach to monetary policy until inflation is in line with its target.
The latest OECD economic forecast, released on Monday, stated that coronavirus could put the eurozone into recession, prompting EU countries to consider a fiscal stimulus. “European member states would be prepared to spur national economies in the event of a severe impact” said EU Commissioner for Economy, Paolo Gentiloni.

In other data released yesterday unemployment remained steady at 7.4%. This morning sees the release of Markit Services PMI, with a market expectation of 52.8 (mild expansion) and Retails Sales data, which is also expected to show an expansion following last month’s 1.6% contraction.

Federal Reserve Cuts Interest Rates Unexpectedly 

In a surprise move, The Federal Reserve (Fed) cut its benchmark interest rate by 50 basis points. The emergency cut came after the growing global economic threat from the coronavirus. “The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate” the Fed said in a statement. Trump has long campaigned for lower rates in order to keep monetary policy competitive with that of other central banks but his reaction to this cut was that it wasn’t enough. Initially, markets were volatile, following the decision, but they quickly settled. Rates will now be 1-1.25% although some analysts are already forecasting an additional cut of 25 basis points later this month with a small chance of the Fed going all the way to zero before the end of the year.

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