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BoE Negative Rate Speculation Sends Euro Pound (EUR/GBP) Exchange Rate Higher

Euro Pound Sterling (EUR/GBP) Exchange Rate Jumps as British Inflation Slows to Four-Year Low

The Euro Pound Sterling (EUR/GBP) exchange rate rallied by around 0.6% on Wednesday afternoon. This left the pairing trading at around £0.8964.

The Pound slipped against the Euro following the release of disappointing UK inflation data which slowed to the lowest level since 2016.

Energy prices slumped as the coronavirus pandemic put the whole country into lockdown in April.

British consumer prices slumped by a monthly rate of -0.2% while annual inflation edged up by 0.8%. April’s fall was the steepest slump since 2008, dampening Sterling sentiment.

Annual inflation was also less than half of the Bank of England’s (BoE) 2% target, also sending the currency lower.

Added to this, the possibility of consistently low inflation has sparked further speculation that more action, including negative rates will be needed from the bank.

Wednesday morning’s data will also intensify the ongoing debate amongst policymakers over whether or not to take interest rates into negative territory for the first time.

Commenting on the possibility of negative rates from the BoE, macro strategist at Societe Generale, Kit Juckes noted:

‘Personally, I can’t think of an economy where negative rates are a worse idea than the UK.

‘The Chancellor has dramatically increased government borrowing and the Bank of England is buying the economy time by mopping most of it up […] How on earth does it make sense to even consider adding negative rates to the mix?’

He also added that negative rates would send GBP lower and ‘if the Pound falls enough, it will make quantitative easing harder.’

Euro (EUR) Rallies despite Weak Eurozone Inflation

The single currency rose against the Pound, supported by the Franco-German proposal for a common fund. This would increase the chances of the EU moving closer to a fiscal union, buoying EUR.

Commenting on this, Societe Generale director of forex, Kyosuke Suzuki said:

‘The Franco-German agreement is big news. This has made it difficult for speculators to close their short positions on the currency.’

Meanwhile, the Euro was able to make gains despite data showing inflation in the bloc edging up by just 0.3% in April.

This was the lowest level for four years as Eurostat downwardly revised earlier estimates after energy prices slumped.

This revision was due to falling energy prices amid an oil price war between Saudi Arabia and Russia and the ongoing coronavirus pandemic.

Euro Pound Outlook: PMI Surveys in Focus on Thursday

Looking ahead, the Pound (GBP) could suffer losses against the Euro (EUR) following the release of British flash PMI data.

If data shows both manufacturing and services activity contracts at a faster pace than expected, it will dampen Sterling sentiment.

Meanwhile, the single currency could also suffer some losses following the release of flash PMI surveys from the Eurozone.

If flash data shows that Germany’s manufacturing and service sectors both remain firmly in contraction, it will leave the Euro Pound (EUR/GBP) exchange rate flat.