The GBP/EUR exchange rate traded in a wide range over the past week, mostly in response to speculation over a possible early rate cut from the Bank of England (BoE).
BoE rate cut expectations drive volatility in the Pound
The Pound fell sharply at the start of this week, with the GBP/EUR exchange rate striking a four-month low after the BoE vowed to take ‘all necessary steps’ to limit the economic impact of the coronavirus.
Expectations for an immediate rate cut were compounded by the Federal Reserve’s shock announcement of an emergency rate cut on Thursday.
However Sterling was able to mount a recovery in the mid-week as incoming BoE Governor Andrew Bailey suggested the bank would need more evidence regarding the coronavirus before it would adjust its monetary policy.
Still, the Pound was unable to recapture its opening levels, with upside in the currency limited through the latter half of the week as the first round of UK-EU trade negotiations came to a close, highlighting the significant gulf that still remains between the two sides on a number of key issues.
Meanwhile, the Euro found support through the first half of the week thanks to broad weakness in the US Dollar, as well as signs that Eurozone governments are beginning to prepare fiscal stimulus measures in order to help counteract the economic impact of the coronavirus.
However the single currency subsequently weakened in the second half of the week after Italy announced it would be shutting all schools and restricting public events in an effort to combat Europe’s largest outbreak of the coronavirus.
How might the UK budget impact Sterling?
Looking ahead, the main catalyst of movement in the GBP/EUR exchange rate next week looks to be the publication of Boris Johnson’s government’s first Budget.
Sterling had previous surged on the expectation that new Chancellor Rishi Sunak’s Budget would see the government go on a bumper spending spree as part of Johnson’s plan to ‘level-up’ the UK.
However since then we have seen the coronavirus come to dominate headlines and this may be reflected in a more conservative Budget, something which could disappoint GBP investor.
For EUR investors the focus will undoubtedly be the European Central Bank’s (ECB) rate decision on Thursday.
This could weigh on the Euro next week if the ECB opts to cut interest rates as part of its response to the coronavirus amidst the very real risk the disease will see the Eurozone slip into recession this year.