Recent sterling movement was largely driven by technical trading as opposed to fundamentals supporting the UK currency. This left the pound as the best performing major currency of the day but when you look at the broader picture, the pound remains the worst performing major of 2020 and will struggle to reach higher levels whilst Brexit negotiations remain gridlocked.

Could the UK economy bounce back quicker than expected?

The UK’s economic recovery from the COVID-19 crisis appears to be slower than other major economies and whilst Bank of England (BoE) members have looked towards a v-shaped recovery, not all economists share that optimism. Recent GDP figures were significantly lower than forecast, 1.8 percent versus a consensus of 5 percent, increasing speculation that the BoE may move to zero or negative interest rates this year.

The UK’s interest rate is already at an historic low of 0.1 percent and it is questionable whether a further move downward would have a positive economic effect? However, with the Bank’s quantitative easing at a record high of £745 billion, the bank has not ruled out the need for lower interest rates and the possibility of negative rates is likely to weigh on the pound. BoE Chief Economist Andy Haldane said, “the UK is reviewing the case for lower rates” and that the bank may look at further quantitative easing if needed.

What will the Bank of England do next?

The UK will likely require further monetary loosening and whilst a cut in interest rates has been discussed, an increase in quantitative easing is the more likely next move. Unfortunately, for the pound this will do little to provide any short-term support as the bank’s asset purchases will only drive down the yield making them less attractive to overseas investors.

With concern about the pace of the UK economic recovery, more attention is being paid to domestic data and Friday’s Retail Sales numbers will be one of the focal points this week. A figure of 8.5 percent is predicted but anything higher would represent a bigger increase in consumer spending, a key driver in getting the economy back to good health. Purchasing Manager's Index data covering business activity including pubs and restaurants for the month of July will also be released at this time, with both the services and manufacturing sectors expected to show expansion with readings comfortably above 50.

Lack of Brexit Progression

Brexit progress and EU rescue fund to drive pound to euro exchange rate

Brexit headlines have been limited and whilst Bloomberg published an article about a “landing zone” being worked on, a basis from which a Free Trade Agreement can be formulated, this has not been officially confirmed by either side. Both the UK and EU have stated they’ll continue to work constructively but there has been little sign of a breakthrough. The two areas of contention are the EU’s continued access to UK fishing waters and the EU “level playing field” demand which would see UK business continue to adhere to EU law with the ultimate dispute resolution being the European Court of Justice.

In Europe, the EU is continuing work on their COVID-19 rescue package. European Council President circulated the latest plan yesterday afternoon, totalling €750 billion, €390 billion from grants (a reduction from the originally proposed €500 billion) and €360 billion of low-interest loans. There is an sense of optimism this time round although the northern states have been pushing to reduce the size of the stimulus package and attach more caveats to the loans. If the EU 27 can reach agreement, this could provide the euro with some support and send pound to euro lower although more interestingly this political movement could signify a deeper financial state integration.

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