Currency Note

Negative rate fears put pressure on pound

By Alexander Fordham May 18th, 2020

The pound has started this week down against the euro and dollar, after the Bank of England once again raised the prospect of negative interest rates. Concerns about Brexit also continue, with last week’s talks said to have made ‘little progress’.

The euro is benefitting from sterling’s weakness this morning, but a number of poor data releases mean it is only a small upward movement, with Eurozone GDP contracting almost 4% quarter on quarter.

In the US, retail sales and consumer sentiment figures, while still firmly in the negative, came in slightly better than forecast, raising hopes of a slow recovery.

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GBP: Negative interest rates put pressure on pound

The prospect of negative interest rates has again been raised by the Bank of England, this time by Chief Economist Andy Haldane, causing the pound to weaken against the euro.

The pound had already ended last week down against the euro, after David Frost warned that Brexit talks had made ‘very little progress’. His counterpart Michel Barnier said that the UK is ‘not realistic’ in what it wants from the European Union, while Frost said the EU was attempting to ‘bind’ the UK to a set of ‘novel and unbalanced proposals’. The EU is said to be stepping up its preparations for a return to WTO rules. The UK is expected to make its draft legal texts public this week.

Earlier last week, the pound also dropped on the release of GDP figures showing growth to have contracted at 2%, with Rishi Sunak commenting that the UK is likely to already be in a recession.

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EUR: Shrinking GDP and poor data keeps euro trading in narrow range

The euro may have closed Friday up against the pound, but it has been trading in a narrow range, held down by poor data releases. The Germany economy shrank by 2.2% in Q1, figures early on Friday showed, while the Eurozone economy as a whole contracted by 3.8% quarter-on-quarter.

Disputes over the ECB’s quantitative easing programme continue, with the ECB stating that it is not subject to the German Constitutional Court, only to European courts, following a ruling by the former that it breaches Germany’s constitution.

USD: Retail sales show small improvement

The dollar was given a small boost against the pound on Friday by better-than-expected data. Retail sales fell, but by less than expected, and Michigan consumer sentiment came in better than forecast. Today’s housing market figures are expected to show a small improvement, although still to remain very weak.

Later this week, we will see manufacturing PMI figures, housing starts and a number of speeches by key Federal Reserve figures, including Jerome Powell.

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