The EURGBP exchange rate slumped after the Bank of England interest rate announcement on Thursday to levels not seen since May 2020. The bank held interest rates steady and refused to announce any further stimulus plans. The bank also saw a healthy bounce in the economy after the first quarter.
EURGBP is trading at 0.8745 and the pair could move lower again to the 0.8685 level which provided support in April 2020.
BoE warns of negative rates but sees strong recovery
The Bank of England have predicted a strong recovery for the UK economy in the second quarter after an expected slump in Q1. The bank warned that lenders should prepare for negative interest rates in July if the economy sees a further crisis, but the path forward is more hopeful.
Analysts had expected the BoE to hold off on further rate cuts, but the path of stimulus was unclear. The negative rate threat has been removed with the signing of the Brexit agreement and the government’s vaccine programme. The country has already administered 10 million shots and is ahead of many other nations in getting the economy opened.
The ECB has promised ultra-easy policy for years to come, with price pressures muted and a recovery from a pandemic-induced recession dragging out.
The Euro was also boosted by news that the ECB’s former President, Mario Draghi, was handed a mandate to lead the Italian government after the resignation of Giuseppe Conte. The move would ease concerns over the country’s political instability and will please bondholders.
HSBC knocks sterling’s ‘risk-on’ nature
HSBC are less bullish on the pound than some with one of the bank’s analysts questioning the currency’s role a risk indicator.
The analysts said that GBP’s role “as a risk-on currency is not well deserved and they see sterling underperforming the G-10 currencies in 2021. This analysis seems to underestimate the country’s movement in vaccines. If the UK has already given 20% of the country a first does in the vulnerable age groups, they would be on track to provide the second dose to those groups in March. This would see the country able to deploy a strategy to open up the economy more quickly than many of those G-10 countries.
The “risk-on” element that HSBC are missing is the undervaluation in the pound created by the Brexit risk premium. Following the signing of the Brexit deal in December, the currency saw no follow-through due to the latest strict lockdowns.
If the UK economy opens up more quickly than its European peers, it will outperform the Brexit gloom scenarios and that could see the EURGBP back near the pre-referendum levels of 0.7400.
The two countries have gone down the same monetary policy path since then and the European situation is harder to control in terms of vaccine logistics and debt markets.
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