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Bailey throws cold water over further interest rate cuts

GBP - British Pound

Yesterday morning was dominated by rhetoric around Andrew Bailey, the Bank of England governor's webinar with the Resolution Foundation. He was to discuss the economic outlook for the UK and set out his thoughts on what is next in our economy's path out of the pandemic.

During the session, he stated that the negative interest rate contingency planning that the Central Bank are implementing does not imply that this is the pathway the bank will take, but merely exactly that, a contingency. He stated that toolkit decisions should not be interpreted about signal of future policy path while also stating that the UK faces a 'two-sided risk' to economic recovery. For now, risk remains tilted to the downside he went onto say, but that these risks are diminishing with time. He also reiterated that the Quantitative Easing programme will be set to continue until the end of the year.

Exchange rates remained relatively range bound yesterday, with GBPUSD hovering between the 1.38 and 1.3850 handle, but there are suggestions that yesterday's comments are buoying the pound in this morning's session.

Key Movers

The US dollar index climbed to its strongest level in 4 months, as investors display a voracious appetite for the greenback currency. Over the weekend, the Senate passed a $1.9 trillion stimulus bill which is expected to pass the House tomorrow and signed by President Biden before the end of the week.

There is a sense that this package will help drive the US economy out of this pandemic, with families in the US due to receive cheques for $1,400 each. This is double the payment that was received at the end of last year and resulted in a strong January retail sales figure in the US, with consumer confidence buoyed. This new payment is expected to do wonders to help consumers to start spending again. There will also be an extended unemployment benefits package and larger child tax credits as President Biden lives up to his election manifesto. This coupled with the extended vaccine rollout and Centers for Disease Control and Prevention stating that its safe for vaccinated people to gather indoors could give the US economy a real boost.

Ten year treasury yields rose 1.6% yesterday, with all eyes on the US CPI data due for release tomorrow and the inflationary impact of the said stimulus package. The EURUSD exchange rate appears to be under pressure, with the demand for US dollars and the weakening euro proving a perfect storm for the currency pair.

An unexpected drop in German industrial production contributed to the move coupled with a slow vaccine rollout, lengthy lockdowns and rising yields in the Eurozone. The expectation is that the Eurozone will lag the US recovery and with it we could see key psychological levels of 1.18 and 1.16 tested on EURUSD.

Expected Ranges

GBP/EUR: 1,1620 - 1.1700 ▲

GBP/USD: 1.3840 - 1.3930 ▲

EUR/USD: 1.1800 - 1.1920 ▼

GBP/AUD: 1.7860 - 1.8230 ▲