A pledge of support from the Bank of England sent the pound tumbling versus the broadly stronger euro on Monday. The pound to euro exchange rate dived 1.7% to touch a nadir of €1.1445. This was a fresh four month low for sterling.
The pound is pushing higher in early trade on Tuesday. GBP/EUR is up 0.2% at €1.1475 at 06:50 UTC.
BoE, Construction PMI & Brexit Talks
The Bank of England has promised to do whatever it takes to shore up the British economy against the impact of coronavirus. Growing anxieties surrounding the outbreak of the virus sent financial markets into free fall last week. Since then the US Federal Reserve, the Bank of Japan and the Bank of England have pledged their support to support each economy. This means loser monetary policy. The pound plunged at the prospect of either increased bond purchases or a rate cut
The pledge from the BoE came on the same morning that the OECD warned over the impact of coronavirus on the global economy. The organisation is the first to sound the alarm over the expected impact of the virus. The OECD warned that it expects global growth to be cut by 0.5% pushing the global economy on the brink of recession.
UK Construction PMI’s are due to be released today. Analysts are expecting the contraction in the sector to slow. Brexit talks could also absorb some attention as the two sides look at what a level playing field would involve.
ECB Doesn’t Have Much Room To Maneuver
The euro is snapping a five-day winning streak versus the pound on Tuesday. Yesterday, the euro was the strongest performing major currency despite the accelerating spread of coronavirus on the continent.
It is safe to say that it is not the eurozone economy which is propelling the euro higher. The eurozone economy continues to experience slow growth despite low interest rates and asset purchases by the European Central Bank.
Instead it is the European Central Bank’s reaction to the coronavirus outbreak which is offering support to the common currency. Whilst central banks across the G7 are pledging support, the ECB’s reaction could only be very limited with interest rates already at -0.5%. Luis de Guidos, Vice President of ECB has said that the response to the crisis should be a fiscal one not a monetary one. This would mean that the eurozone governments would do the heavy lifting rather than the ECB cutting rates.
