It’s a major decision by the Bank of England to inject a whopping £100BN into the economy towards quantitative easing.
But the British Pound continues to decline against major currencies like the Euro and Dollar. It is losing against its major peers and this is affecting its short-term trend which is dragging it downwards against other currencies. The quantitative easing has not brought much relief according to investors and their negative sentiment is pulling the GBP/USD lower.
In June, GBP/USD saw a peak on the 10th after which there has been a downward movement. There is a strong bear sign after the pair broke below its major support at 1.2500 yesterday. It is seeing a three-week low at around 1.2360. The Brexit talks and stimulus measures from the Bank of England are key drivers for the currency.
On Thursday, the Pound fell by 0.73 percent against the Euro and down by 1.0percent against the U.S. Dollar. This movement came as per expectations after the £100BN quantitative easing by the Bank of England.
The Dollar index is however showing a strong up move and is expected to see a gain for the second consecutive week. The upward momentum however lacks a strong conviction and is expected to reach levels of 1.2355. If it moves past 1.2500, it may set a near-term positive outlook.
Bank of England’s £100BN Quantitative Easing
Investors expected more than a £100 bn quantitative easing that has been announced by the BoE. The Federal Reserve and the ECB had promised to do whatever it takes to keep their economies afloat and the same expectations were sought by investors from the Bank of England.
Meanwhile, BoE has taken a positive stance on improved data and has revised its GDP forecast to -20%, which is an improvement from a forecast of -27%. However, if the coronavirus continues on to the New Year, banks may fail as they cannot bail out other companies forever.
Bank of England has kept rates unchanged. However, its asset purchase program has not come up to analysts’ expectations, signifying a hawkish stance by the BoE. MPC members have expressed their concern over the flailing economy and are looking towards further policy easing.
May Retail Sales Report
Earlier, the May retail sales report has sent strong signals to investors as it shows signs of recovery, though Sterling continues to waver. Retail sales for May, which saw a forecast of 6.3 percent has, however, reported an increase of 12percent, which is twice that of market expectations. In April, there was a contraction of -18 percent. However, it still projects a yearly reading of -13.1 percent. GBP exchange rates have not reacted positively to strong reports from May retail sales.
Trade Negotiations Unnerves Pound
Brexit talks have reached a deadlock and trade negotiations between the UK and EU are expected to stall until the end of the current year. Fear that it might spill into the next year too is raising major concern.
Prime Minister Boris Johnson states that he expects a deal to be put in place by autumn, showing his optimistic stance on the economic problem. When a permanent deal is reached, the GBP/EUR rate is expected to show a positive upturn as investors will be buoyed by the agreement. “I see no reason why we should not get this deal done by July,” says PM Johnson.
Brexit uncertainty is weakening the pound and internal situation in the economy is not helping them make a recovery, says Valentin Marinov from Credit Agricole.
Economic Health
With a fresh wave of coronavirus infection, scaring the economy, investors prefer safe-haven assets like the US Dollar, amid the pandemic. The coronavirus data continues to affect the value of the pound. The state of the economy depends on the reopening after the quarantine and investors continue to monitor the currency.
Bank of England states that job growth may take many more months to catch up. However, the Bank expects jobless rates to see a minor recovery in the coming days.
June PMI projections to be published on Tuesday have predicted that the economy may rebound from the coronavirus pandemic. It is expected that the BBP/USD exchange rate will reflect the PMI data in the U.S.
Sterling Remains Vulnerable
Sterling is taking direction from the decisions made by BoE and negotiations on Brexit trade. The currency is vulnerable and is performing poorly when compared to other competing currencies. Trade negotiations have affected Sterling too. Even if there is an improvement in June PMI data to be published on Tuesday, the Sterling may continue to remain weak as the government faces intense criticism about the way the pandemic has been tackled. If data is not good, it is expected to weaken further.
Despite the positive note from the Bank of England and good retail sales, Sterling continues to show weakness.
