Jonathan Watson
September 18, 2020


With the rate already at record lows of 0.1% and policymakers running out of financial ammunition to fight the negative headwinds the UK is facing, the minutes of the meeting indicated the bank has been ‘exploring’ in more detail the possibility of negative rates as well as more Quantitative Easing (QE).image

QE is the purchasing of government bonds by a Central Bank, and just like the prospect of lower or negative interest rates, can typically cause the currency concerned to weaken.

The pound may well be at risk of further falls ahead now as the market debates the likelihood of negative interest rates, whilst any more positive news could trigger a rebound.

Yesterday, the Financial Times quoted sources indicating the market is now also expecting a further £100bn of QE at the Bank’s next meeting in November.

This coupled with the expectation interest rates could be down at -0.1% for 2021, highlights the reason for the drop in the value of the pound.


This morning we have had the latest UK Retail Sales figures released, where we have seen a further rebound in activity for August up 0.8%, partly linked to the Eat out to Help out scheme where the British Government supplemented meals out at restaurants.

Despite the good news from the data, John Lewis has announced a cut in its partnership bonus for the first time in its history and the British Retail Consortium has warned of further job losses ahead in the sector. Despite this concern for the high street and department stores, Amazon has announced it is hiring an extra 10,000 workers in a further sign of the shift from high street to online.

Whilst the pound has risen slightly in early morning trading at 1.0935 on this news, we are still below the 1.1008 high reached yesterday. However, we are 5 cents above the interbank low of 1.0533 on GBPEUR, reached on the 19th March and the more recent 1.0767 reached just 1 week ago.

A £200,000 purchase of euros today could net you €8000 more than the March lows and €3200 more than only a week ago based on interbank exchange rates. For GBPUSD, the current interbank rate of 1.2978 is still considerably better than the lows of 1.1435 seen in March, although down from the recent 1.35 seen earlier this month.


It is exactly 15 weeks today until Friday 1st January when the transitional phase will have ended, and Britain will firmly have left the EU. With no new trade arrangement in place, the currency market is preparing for a ‘no-deal’ arrangement.

In terms of how this will affect the pound, this week Goldman Sachs has reiterated that it foresees the euro to pound rate hitting parity on a ‘disorderly no-deal’ with the market currently pricing in a 40-45% chance of this outcome. Société General predicted this week that the chance of no-deal is closer to 80%. A more positive outlook comes from BNP Paribas whose base case sees GBPEUR hitting 1.15 as a deal is agreed, with GBPUSD hitting 1.41.

October will be key with the latest EU Summit on the 15th and 16th. For many months, this Summit has been perceived as a crunch point in the talks which will give us some greater clarity. Historically, any of these important deadlines on Brexit have seen the pound weaker in the run up to the event before an agreement has triggered sterling strength on the final news.image

Examples include the March 29th 2019 exit date that was then postponed until October 2019, where again sterling was weaker before rising once agreement was made. The difference here is that the UK is adamant about leaving with no-deal if one cannot be found, there is therefore arguably a greater degree of pressure which could result in greater volatility for the pound.

Whilst on the face of it there appears to be a binary deal or no-deal outcome, there has also been talk of a very bare bones deal or ‘temporary arrangement’, which might be essentially a ‘no-deal’ but with some very limited agreements on certain issues and a plan to work on more detail in the future.

All in all, there is much that could happen in the coming weeks and plenty of potential for a volatile pound as the market digests any twists and turns.


Financial markets are still very much under the influence of the global policy responses to COVID-19, with the US Federal Reserve meeting this week and indicating their plan to keep interest rates on hold until at the earliest 2023.

The US dollar was weaker on this news, and ripples on the US dollar can influence other currency pairings. Part of sterling’s bounce this week can be attributed to the weaker dollar which has dragged the pound up against other currencies.image

In the race towards the US election scheduled for 3rd November Trump is running at 42.2% in the polls trailing Joe Biden on 49.9% of the national vote. Trump has without doubt enjoyed a resurgence in recent weeks and what was previously looking a very likely win for Biden is now wide open.

We are already seeing the effects on the currency market with a focus on the US dollar as well as the pound with Nancy Pelosi stating the UK would not get a trade deal with the US if it disrespected the Withdrawal Bill. Biden also waded into the controversy over the UK Internal Market Bill and there appears likely to be further opportunity for further disagreements ahead. The race for the White House may present plenty of opportunity for further volatility in the currency market for the US dollar but other currencies including the pound too.