The GBP/EUR exchange rate sought to mount a recovery over the past week, but found its advance tempered by the Bank of England (BoE) and its hints that negative interest rates could be on the way.
Pound’s Bullish Recovery Curtailed by BoE
After collapsing last week on the back of heightened Brexit uncertainty, the Pound was quick to rebound this week, with Sterling enjoying a bullish run through the first half of the week.
The upside in GBP exchange rates appeared to be driven by fading Brexit concerns, despite the risk of a no-deal Brexit continuing to rise by the day.
Sterling’s gains also defied some lacklustre UK data releases, which revealed domestic unemployment rose to a two-year high and inflation tumbled to just 0.2% its lowest levels since 2015.
However the Pound’s bubble was burst in the latter half of the week, following the BoE’s latest policy meeting.
This reportedly saw policymakers briefed on how negative interest rates might be introduced, sending a strong signal to GBP investors that the BoE is seriously considering such action.
The Euro, meanwhile, stumbled this week. The appeal of the single currency being undermined by new coronavirus restrictions being imposed by some European countries as well as a strengthening of the US Dollar (USD) following the Federal Reserve’s latest policy meeting.
Brexit Back on the Menu?
Turning to next week, it’s likely we see the Pound to Euro (GBP/EUR) exchange rate infused with fresh volatility as Brexit starts to dominate headlines once.
The internal markets bill will return to the House of Commons next week for a second debate, which it is likely to pass following concessions from Downing Street to Tory rebels.
The passing of the bill will cast a long shadow over the latest round of UK-EU trade talks, which are set to resume next week. Sterling is likely to face an uphill battle as the bill increases the chances of negotiations ending in deadlock.
Also of note to GBP investors will be the UK’s latest PMI figures, with Sterling vulnerable to additional pressure if private sector activity slowed sharply in September.
Meanwhile, EUR investors are likely to be focused on the Eurozone’s own PMI releases next week.
This could put some significant pressure on the Euro if September’s preliminary figures confirm fears that the Eurozone’s recovery is stalling amidst a resurgence in coronavirus infections across Europe.
Also potentially influencing the single currency will be Germany’s latest confidence figures. Will an improvement in consumer and business sentiment offer some support to the Euro?