GBP/EUR – Pound Volatile as Odds of Negative BoE Interest Rates Shift
Speculation over the odds of the Bank of England (BoE) potentially cutting interest rates into negative territory prompted significant volatility for GBP exchange rates.
The mood towards the Pound generally soured after comments from chief economist Andy Haldane and governor Andrew Bailey seemed to put the possibility of negative rates on the table.
However, Haldane subsequently rowed back on the likelihood of the BoE taking such a move any time soon and the GBP/EUR exchange rate recovered some of its lost ground.
GBP/EUR made more gains as easing lockdown restrictions in the UK, with shops planning to reopen in June, gave the Pound support.
The Pound’s losses seem to be returning as Brexit trade negotiations seem at an impasse, weighing on the Pound. With the UK’s Chief Negotiator David Frost stating the EU’s offer cannot be accepted and there will not be any extension to negotiations, GBP/EUR is likely to stay volatile.
GBP/USD – Improved UK PMIs Fail to Encourage Pound Rally
While the UK manufacturing and services PMIs picked up from April’s record lows in May, this only offered a temporary boost to the Pound.
As both sectors remained deep in contraction territory the UK economy still looks set to experience a major slowdown in the second quarter, keeping GBP exchange rates under pressure.
Meanwhile, April’s UK government borrowing rose to a record high, highlighting the extent of the Covid-19 crisis’ impact on the economy.
The pound could look vulnerable to further selling pressure this week as shifting risk appetite continues to influence GBP/USD exchange rates.
USD/GBP – US Dollar Shifts with Risk Appetite
The latest set of Federal Open Market Committee (FOMC) meeting minutes failed to offer the US Dollar any boost, even as policymakers further diminished the possibility of negative interest rates.
With the Fed still expressing concern over the economic outlook in the face of the ongoing pandemic, the odds of further policy action continued to pick up.
However, as the Chinese government unexpectedly chose not to set a GDP target for the current year and US-China tensions remain, a resurgent sense of market risk aversion helped to boost USD exchange rates.
USD/GBP could fluctuate as news that a US biotechnology firm had begun trials for a coronavirus vaccine limited the US Dollar’s appeal causing safe-haven demand to drop.
Another sharp monthly decline in durable goods orders could see the US Dollar fall out of favour further as the risk of a deeper economic contraction continues to build.
EUR/USD – Euro Stumbles as ECB Warns of Rising Financial Vulnerabilities
Signs of modest improvement in May’s set of Eurozone manufacturing and services PMIs offered limited support to the single currency ahead of the weekend.
Demand for the Euro weakened sharply in the wake of the European Central Bank’s (ECB) latest financial stability report, which warned of increasing financial vulnerabilities within the bloc.
With the central bank seeing a rising risk of another potential Eurozone crisis down the road investors saw little reason to favour the single currency over its rivals.
If May’s Eurozone business and consumer confidence indexes fail to show improvement on the month this could fuel further downside pressure for EUR exchange rates.
However, there could be some upside for the Euro, with the EU nearing agreement on its €500bn recovery fund boosting market optimism.