The pound was pulled from different directions yesterday, as on the one hand, the Bank of England hinting at negative interest rates pushed it lower, and on the other hand, positive Brexit news helped lift it.
The pound fell after the Bank of England said that it is considering how to use negative interest rates and it will discuss with regulators how to efficiently implement them. The pound dropped sharply after the announcement.
As quoted on Bloomberg, Valentin Marinov, head of foreign exchange research and strategy at Credit Agricole SA, said: “Negative rates are the nuclear option. It could ultimately push the pound into uncharted territory of losing whatever is left of its rate advantage.”
A Brexit Trade Deal is Still Possible
Despite the negative news, there was a glimpse of positivity on Thursday after the EU Commission President Ursula von der Leyen said that she remains "convinced" that an EU-UK trade deal is still possible, which helped the pound recover. Von der Leyen, speaking to the Financial Times, said: "I am still convinced it can be done. It is better not to have this distraction questioning an existing international agreement that we have, but to focus on getting this deal done, this agreement done - and time is short." Another EU diplomat said that "we should not overreact... We will continue negotiations because there are two separate tracks: one is the one which the UK has decided to violate, and the other is the future relationship."
If markets maintain a similar view that a trade deal is possible then the pound will be supported.
Bank of England’s Negative Interest Rate Surprise
After the Bank unexpectedly said that it was considering the possibility to cut interest rates to 0% or below in the coming months, to help support the economy, the pound fell. There have never been any negative interest rates before in the UK and if the Bank moves ahead with changing the rates to record lows, this could really shake the financial system, especially due to the UK’s current account deficit. As Pound Sterling Live noted, this could leave “the UK's financial system, and Pound Sterling in particular, exposed to capital withdrawals from foreign investors.”
The shocking revelation was found within the Bank’s minutes to the meeting where it stated that it would start a "structured engagement" with the Prudential Regulation Authority in order to potentially cut interest rates to negative.
Senior market analyst at Western Union, Joe Manimbo said: "The U.K. Pound staged a swoon after the Bank of England dropped clear signals that it was edging closer to implementing negative borrowing rates. The big news was that officials were actively studying plans to push rates below zero given the ‘unusually uncertain’ economic outlook. Central bankers noted better data of late but signalled heightened concern related to Covid uncertainty, expectations of a sharp rise in unemployment and potential Brexit shocks."
However, some economists believe that the Bank will not push interest rates into negative territory and the recent news is part of the Bank’s research into negative interest rates rather than something more solid and definite.
But as Bloomberg said, a no-deal Brexit might just be the trigger for the BoE to use negative rates: “It’s becoming increasingly likely that if the economy is blown off course next year, the central bank could employ sub-zero rates.”
With the UK struggling to contain coronavirus infections, the imposition of new lockdown restrictions, unemployment and a disruptive Brexit could make the situation in the UK very difficult and push the Bank to make some hard decisions.
Are you Transferring Funds Abroad?
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