Bailey boosts Pound!

2021-01-12 21:07    HotForex
Bailey boosts Pound! Institution Opinions

BoE’s Bailey remains sceptical on negative rates. The central bank Governor said that the resurgence of Covid-19 cases leaves the economy in a difficult situation and could “delay, probably, the trajectory”. However, he still sees the basic shape of the recovery matching the BoE’s expectations that were outlined in the November inflation report.

Unemployment is expected to peak around 7-8% partly thanks to the government’s job protection programs. Virus developments will probably depress overall economic activity in the first half of the year, but Bailey said the impact of restrictions seems to be somewhat less negative than during the first lockdown last year. Unlike MPC member Tenreyro, who seemed to want to keep the option of negative rates on the table, Bailey once again highlighted that there are a “lot of issues” with cutting rates below zero. Bailey said “in simple economics and maths terms, there is nothing to stop it at all”, but still focused on possible problems, saying that negative rates would complicate banks’ efforts to earn a rate of return, potentially hurting their lending to companies, and that it was not easy to draw a direct parallel with similar action in the Eurozone.

Markets have pushed out rate cut expectations and indeed, it seems as long as vaccination programs help to keep recovery hopes alive, the BoE would rather not go down the negative rate path, even if the short term outlook is negative.

The Pound is modestly higher today following Bailey’s comments, after a 7-day decline. Today’s rebound reverts nearly 60% of losses seen since the 1.3700 peak. The bias so far in the new year has been an underperforming one. UK nations went into a ‘tier 5’ lockdown last week, the most restrictive level since the full lockdown of spring last year, although there is already talk of a yet more restrictive ‘tier 6’ being introduced.

The UK’s terms of trade with the EU, meanwhile, has also eroded in the Brexited world, despite the deal, with the key financial services sector left in a strategically more precarious position than before, with participation in EU markets dependent on the latter’s equivalency rules — although London’s competitive advantage in this area should protect the sector over the near- to-medium term. There is also potential for pent up business investment, with Brexit uncertainty having finally cleared, while the UK is ahead of the pack in rolling out a Covid vaccination program.

The Pound’s weakening bias may prevail for a time, but with the government aiming to have nearly 25% of the UK population vaccinated by mid February, including all of the most at-risk groups, the Pound looks a much better bet in the bigger view. The UK data calendar this week is highlighted by the release of production, monthly GDP and trade data for November, which are due on Friday. Given the fast changing realities (new Covid lockdown, rapid vaccination program) the data is particularly backward looking, so will have limited, if any, market impact.

 

 

Andria Pichidi

Market Analyst

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