Bailey talks down negative rates
Wednesday 13 January, 2021
Daily Currency UpdateGBP bounced as the Governor of the Bank of England, Andrew Bailey, suggested that negative rates may not be the best idea in the short term. Many believed Bailey would cut the UK interest rate into the negative for the first time at the next meeting on 4th Feb, however this is looking less likely. Bailey warned that negative rates would slow economic recovery unnecessarily, as it would mean there are less available funds to fuel recovery. The pound reacted well to the news, pushing GBPUSD back above the 1.36 handle. The Bank of England will most likely intervene, should they have to, however this could be in the form of quantitative easing before a rate cut. Bailey also mentioned how he thought that the UK unemployment rate was closer to 6.5%, than the 4.9% official figure, and warns that it may get far worse in the spring, once the furlough financial aid dries out. This may force his hand into a rate cut.
Key MoversA few members of the Fed have set the tone for the Biden stimulus package this week, as they spoke on the US recovery and action needed to combat COVID. They believe that further tightening is needed, however the recovery for the US economy is optimistic. The vaccine being rolled out to full capacity, combined with the stimulus package from the Fed, should set the US up to begin recovery in Q2. The US Dollar could trade erratically in the build-up to Biden’s stimulus package announcement, as traders look to read between the lines and assess the tone of the package.
The Euro continues to hold strong, despite many factors acting against them. Germany are the latest to tighten restrictions, with Merkell stating that if they are unable to hold off the ‘UK virus’ variant, then they could see a uptick in cases by Easter of up to 10 times the current rate. The Euro seems to be held up by low interest rates, vaccine optimism and lack of demand for the US Dollar from global investors.