Good week for Sterling after Bank of England plays down fears of negative interest rates

Mon 26 Oct 2020
Posted by: William Barns-Graham
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The pound had a strong last week after the Bank of England (BOE) said that it does not think negative interest rates are a good idea.

This and continued optimism around the trade talks with the EU has seen Sterling hold steady against the euro and rise against the US dollar.

BOE shuns negative interest rates

BOE Deputy Governor Dave Ramsden said that cutting interest rates below zero risks damaging British banks’ capacity to lend and is therefore not the right approach towards stimulating the economy.

“While there might be an appropriate time to use negative rates, that time is not right now,” Ramsden said at the annual conference of Britain’s Society of Professional Economists. He also said asset purchases were a better instrument for boosting demand.

Economists polled by Reuters expect the BOE to expand its asset purchase programme by £100bn pounds next month to £845bn.

Pound steady as EU talks continue

The comments saw the pound go up slightly against the euro, from €1.09 to €1.106 before closing on Friday at €1.100.

The resumption of trade talks with the EU trade also supported Sterling.

Reports over the weekend suggest that the current round of negotiations have been extended until Wednesday this week, while the UK government has indicated optimism about the chances of a deal.

Pound strengthens against dollar

The pound also increased against the US dollar rising from US$1.29 to $1.31 during the week, closing at $1.30.

The dollar has been weighed down by the slim chance of there being a stimulus package until after the presidential election in early November.

The US dollar index moved to a low of 92.5 on Wednesday but recovered slightly to 92.9 by the end of the week.

Equities struggle as stimulus wait goes on

The lack of certainty over stimulus also impacted equities. Data on Thursday pointed to a slowing recovery in the US labour market, which did push stocks high towards the end of the week, but traders are generally pessimistic.

Analysts believe that investors have essentially given up hope of an agreement being made any time soon.

Instead they are now betting on Joe Biden and the Democrats winning a clean sweep of Congress and the White House in the November elections, paving the way for an even bigger spending package in the new year.

PayPal enters crypto fray

PayPal this week confirmed its entry into the crypto asset industry with the announcement that it was enabling the buying, selling and holding of cryptocurrencies on its platform.

Within the next few weeks, users in the U.S. will be able to trade Bitcoin, Ether and Litecoin using their PayPal accounts.

This caused a 15% increase in the bitcoin price which exceeded US$13,000 at one stage – its highest level since July.

Quiet week for gold

Gold prices were fairly subdued last week, with prices stuck between US$1,928 and $1,900 per ounce.

Week ahead

We await news regarding the extended EU trade negotiations but also have the following data releases:

Tuesday

  • US durable goods orders

Thursday

  • European consumer inflation and unemployment figures

Friday

  • US unemployment figures, Personal Consumption Expenditures (PCE) price index and GDP figures
  • European Central Bank (ECB) Interest rate decision and minutes
  • EU core inflation and unemployment rate data