Prospect of negative interest rates weighs on GBP

Philip McHugh May 21st 2020 - 2 minute read

Sterling slipped on Wednesday in response to worse-than-forecast inflation data and bets that the Bank of England (BoE) could implement negative interest rates.

The pound remains under pressure this morning, with GBP/EUR slipping to €1.1120 and GBP/USD drifting to $1.2188. GBP/CAD is trading at C$1.6973, while GBP/AUD and GBP/NZD have fallen to AU$1.8563 and NZ$1.9924 respectively.

Today investors will be focusing on PMI data from the UK, Eurozone and US, as well as US initial jobless claims. 

What’s been happening?

The mood towards the pound soured yesterday as Bank of England (BoE) Governor Andrew Bailey refused to rule out the possibility of negative interest rates.
Sterling also stumbled as the UK released its latest inflation figures. The non-core inflation rate fell from 1.5% to 0.8%, while core inflation eased from 1.6% to 1.4%. The results increased the odds of the BoE taking interest rates below zero.
The euro, meanwhile, was supported by news of a Franco-German common fund proposal, as well as an unexpected improvement in the Eurozone consumer confidence index.
The sentiment index rose from -22.0 to -18.8 rather than slipping to -24 as expected.
Improved risk appetite left the US dollar on the backfoot ahead of the release of minutes from the last Federal Open Market Committee (FOMC) meeting.

What’s coming up?

Overnight investors reacted to the FOMC minutes from the central bank’s April gathering. In the minutes the Fed detailed a potential second wave virus scenario, one that could have negative ramifications for the US economy heading into 2021.
The Fed stated: ‘In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.’
Meanwhile, today’s UK and Eurozone manufacturing and services PMIs will provide an indication of how the regions’ respective economies are holding up.
If levels of output improved in May both the pound and euro could find some support.
Economists have forecast that the UK composite index will improve from 13.8 to 25, still significantly below the 50 mark separating growth from contraction, but a decided improvement.
The US Markit manufacturing and services PMIs are also expected to show improvement, but US initial jobless claims may be of more interest to investors.

Written by
Philip McHugh

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