GBP/USD: Pound Spikes vs. Dollar Following BoE Announcement

The British pound is lower against the euro on Tuesday.

The release of a 50-page document unveiling details of the UKs roadmap to ease lockdown restrictions has done little to aid the selling pressure in Sterling so far this week.

The rising risk of negative interest rates in the United States has pushed down the dollar and the euro has been a beneficiary.

Pound versus euro was down by 72 pips (-0.64%) to 1.1335 as of 3pm GMT.

GBP/EUR had been trading sideways around 1.14 but slid sharply in the afternoon to near 1.132.

GBP: Sunak extends furlough sheme

As markets parsed the details of the 50-page roadmap for Britain easing lockdown restrictions the pound still came under pressure. There was however, some positive news for British workers from UK finance minister Rishi Sunak. The UK will extend is furlough scheme offering 80% of people’s salary up to £2500 until October.

It was a decline in the dollar that seemed to benefit the euro more than the pound. The euro-dollar currency pair (EUR/USD) jumped and carried the euro higher against other major currencies including the British pound.

EUR: Prospect of negative US rates send euro higher

Part of the conversation pushing down the dollar was that of negative interest rates, a subject that was commented on by the Fed’s Bullard, Kaplan, Harker and Kashkari on Tuesday.

Last week Fed funds futures priced in negative US interest rates for the first time. A quick reminder that Fed funds futures are market in which traders try to predict where the US Fed funds rate (the official interest rate set by the Federal Reserve) will be at various times.

Whenever there is a Federal Reserve meeting, investors look at these contracts to judge market expectations. The Fed actually uses these prices to judge how effectively they are communicating their plans.

So it’s not clear this far out if there will be negative rates in the future – but in general, markets have a much better track record at forecasting than central banks themselves. For the Fed to go to negative rates, the economic scenario would have to be pretty desperate in the United States, and hence some weakness in the dollar.