Pound Sterling Euro (GBP/EUR) Exchange Rate Jumps despite Prospect of UK Recession
UPDATE: The Pound Sterling Euro (GBP/EUR) exchange rate rallied by around 2% on Friday, leaving the pairing trading at around €1.0995.
Sterling rallied despite the prospect of a UK recession weighed on markets due to the spread of coronavirus.
Capital Economics has suggested the economy could shrink by 15% in the second quarter, although hope this will not last long.
According to Capital Economic’s economist, Andrew Wishart:
‘We know that these indicators are going to get worse. Their real value will be showing us how quickly the economy is getting back to normal after the virus is under control. We expect the recession will be short-lived and the recovery will be fairly fast.’
Pound Sterling Euro (GBP/EUR) Exchange Rate Rises as Emergency BoE Cut Sends Rates to Record Low
The Pound Sterling Euro (GBP/EUR) exchange rate rallied by around 1.9% on Friday as market volatility calmed. This left the pairing trading at around €1.0989.
The Pound made gains this morning after the US Dollar’s rally cooled, causing market volatility to calm on Friday.
In an attempt to help slow the spread of the coronavirus pandemic, California announced a stay-at-home order for its 40 million residents.
Added to this, Sterling clawed back some losses today, after Thursday saw another emergency rate cut from the Bank of England (BoE).
In a second March emergency rate cut, the bank cut rates to a low of 0.1% and ramped up its bond-buying programme. GBP was buoyed by the bank’s attempts at shielding the economy from the economic effects of coronavirus.
This allowed the Pound to rebound from an earlier 35-year low against the US Dollar. Added to this, after slumping near an 11-year low against the Euro, the pairing was headed towards a second day of gains.
Sterling also benefitted from an improvement to risk appetite, and according to Neil Jones, head of hedge fund FX sales at Mizuho Bank:
‘Liquidity is a lot better in Sterling than it was yesterday. There has been buying and selling in both directions. As opposed to yesterday when all you had was a near vertical downward line’
Euro (EUR) Slides as Europe Becomes the Pandemic Epicentre
The Euro extended its losses against the Pound on Friday, as traders seemed to shrug off this morning’s announcement that Germany plans to offer companies support of half-trillion Euro.
As the coronavirus pandemic continues to spread across Europe, the German Finance Ministry is also considering direct support programmes. According to Der Spiegel magazine, a ministry official said:
‘We are considering orders of magnitude that simply haven’t existed before.’
However, while the Pound was able to claw back losses, the single currency edged higher against its main rival, the US Dollar (USD).
The EUR/USD exchange rate was able to rebound after Thursday saw the pairing’s worst one-day loss since June 2016.
Both the Euro and Pound suffered earlier this week as investors sold everything to move their money into the safety of the Dollar.
Commenting Sterling volatility, Kenneth Broux, FX strategist at Societe Generale said:
‘It’s been extraordinary. The Pound is acting more like an emerging markets currency.
‘Tuesday was panic stations and we had a big blow out in gilts. Investors have been liquidating all types of investments just to drum up cash (in Dollars).
‘A lot of investors were terrified by the chance of Sterling falling even lower and deeper losses […] The Bank of England’s action was very timely.’
Pound Euro Outlook: Will GBP Extend Today’s Gains?
Looking ahead, the Euro (EUR) could suffer further losses against the Pound (GBP) following the release of German import prices.
If next week’s data shows February’s prices have plummeted further than expected, the single currency will slide.
Meanwhile, further weakness in the US Dollar and further stimulus measures from the British government could support Sterling.
If the government announce further measures to help protect the British economy, the Pound Euro (GBP/EUR) exchange rate will rise.