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Weekly Update: Pound Support Limited as BoE Fails to Rule out Negative Rates, Euro Rallies on Common Fund Hopes

As Bank of England (BoE) Governor Andrew Bailey failed to rule out the possibility of negative interest rates the Pound came under renewed pressure.

Souring US-China trade relations continued to boost the US Dollar against its rivals, meanwhile, as fears of fresh disruption to the global economy picked up.


Pound Sterling Under Pressure as Bets on Negative BoE Interest Rates Grow

GBP/EUR – Unchanged on the week’s opening levels

GBP/USD – Up two cents on the week’s opening levels

With BoE policymakers leaving the possibility of negative interest rates on the table the Pound was exposed to fresh selling pressure this week.

However, the Pound found some limited support on the back of May’s set of UK PMIs, which bettered forecasts.

As the decline in both the service and manufacturing sectors showed signs of having bottomed out anxiety over the outlook of the UK economy temporarily eased, to the benefit of GBP exchange rates.

Another negative reading from the CBI distributive trades index for May could see the Pound shedding fresh ground against its rivals as fears of a deeper second quarter contraction linger.


Euro Strengthens on Eurozone Common Fund Proposal

EUR/GBP – Unchanged on the week’s opening levels

EUR/USD – Up one cent on the week’s opening levels

As France and Germany put forward a proposal for a common fund to support the Eurozone’s recovery from Covid-19 the mood towards the Euro improved.

A solid improvement in the latest German economic sentiment index added to the positive atmosphere, suggesting that the disruption caused by the pandemic is already starting to fade.

The release of May’s German inflation data could see the single currency come under pressure, though, as the possibility of further European Central Bank policy action continues to hang over the Euro.


US Dollar Gains Limited by Signs of Fed Caution

USD/GBP – Down one pence on the week’s opening levels

USD/EUR – Down one cent on the week’s opening levels

As relations between the US and China continued to sour this helped to drive the US Dollar higher across the board in the early week.

However, as the Federal Reserve maintained a cautious outlook on the US economy the possibility of future monetary loosening limited the potential for further US Dollar gains.

Fresh signs of weakness from the US manufacturing sector could see the US Dollar fall out of favour with investors in the days ahead, especially if the wider sense of market risk aversion fades.


Australian Dollar Slips as Manufacturing Sector Decline Worsens

AUD/GBP – Up one pence on the week’s opening levels

AUD/USD – Up one cent on the week’s opening levels

The Australian Dollar struggled as the Australian manufacturing sector unexpectedly fell deeper into a state of slowdown in May.

With market confidence generally limited thanks to the increasing risk of a fresh US-China trade spat there was little reason to favour the antipodean currency this week.

Even so, the mood towards the Australian Dollar could improve in the week ahead as long as the global economy appears to remain on course to reopen as the Covid-19 crisis eases.


Key Data

May 25 EUR Germany IFO Business Sentiment (May)

May 26 GBP CBI Distributive Trades Index (May)

May 26 USD Dallas Fed Manufacturing Index (May)

May 28 EUR Business Confidence Index (May)

May 28 USD Durable Goods Orders (Apr)

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