Pound Sterling Euro (GBP/EUR) Exchange Rate Sinks as Investors Fret Over Negative Rates
The Pound Sterling Euro (GBP/EUR) exchange rate slumped by around -0.5% on Wednesday. This left the pairing trading at around €1.1174.
The Pound suffered losses this morning as the safe-haven US Dollar (USD) regained strength and investors began to fret over negative interest rates.
The focus shifting back to the possibility of the Bank of England (BoE) taking rates back into negative territory. This allowed the Euro to make gains as traders opted for safer bets.
On Tuesday, the BoE’s Chief Economist Andy Haldane played down the prospect of the bank dragging rates into negative territory. He noted that ‘reviewing and doing are different things’.
However, analysts believe that once this has taken hold in markets it will be hard to shift focus away from it.
Commenting on this, MUFG’s head of research, Derek Halpenny noted:
‘The door has been opened to the prospect of negative rates given the BoE clearly before has explicitly ruled out negative rates.
‘We do not see Haldane’s comments yesterday as a signal of a reversal of the negative rate speculation.’
ECB’s Lagarde: Eurozone Economy to Shrink by 8% to 12%
The single currency was able to make gains today despite comments from the head of the European Central Bank (ECB).
In a speech this morning, ECB chief, Christine Lagarde said the bloc’s economy is likely to shrink between 8% and 12% in 2020.
The Eurozone’s economy will shrink as the bloc struggles to overcome the coronavirus pandemic this year. Although, the Euro was able to make gains today as Sterling weakened.
Earlier the bloc’s central bank said the economy may shrink between 5% and 12%.
However, Lagarde said this ‘mild’ scenario was already outdated and the actual outcome would be between the ‘medium and severe’ scenarios.
Pound Euro Outlook: BoE and Negative Rates in Focus
Looking ahead to Thursday, the Euro (EUR) could give up some of today’s gains against the Pound (GBP) following confidence data.
If the bloc’s business confidence plummets further than expected in May, the single currency could be left under pressure.
However, Sterling could remain under pressure this week if markets continue to focus on negative interest rates.
If investors continue to speculate about the Bank of England (BoE) taking rates into negative territory, GBP could fall. This could offset weak Eurozone data and cause the Pound Euro (GPB/EUR) exchange rate to fall.