Pound rallies after BOE rules out negative interest rates in short-term and predicts 2021 recovery

Mon 8 Feb 2021
Posted by: William Barns-Graham
Features

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The Bank of England (BOE) last week confirmed that it is unlikely to introduce negative interest rates in the near future after the Monetary Policy Committee (MPC) voted unanimously to keep rates at their current record-low but above-zero levels.

The news prompted a rally for Sterling against the euro, dollar and other major currencies.

Pound rallies

The pound’s value against the dollar jumped on the MPC’s decision on interest rates, bouncing from US$1.36 to $1.37 within 90 minutes of the announcement last Thursday.

It continued to rally throughout Friday finishing the week at its highest point of $1.374.

Against the euro, Sterling rose from a low of €1.13 to an eight-month high of €1.14 on Friday. 

Market confidence

The BOE also predicted that the economy should recover towards “pre-Covid levels” in 2021.

The UK’s vaccination programme has been the main driver of rising market confidence in the UK, with 16.5 doses administered per 100 people last week – comparing favourably to the rate of 3.5 doses per 100 in the European Union.

Euro falls as US dollar strengthens

The euro fell to a low of US$1.195, continuing a decline from the $1.23 value it reached earlier in early January. It finished the week worth around US$1.20.

The dollar continues its recent recovery in part due to renewed optimism that President Biden will be able to pass his $1.9 trillion fiscal stimulus package through the Senate without needing Republican support.

Dollar strength also came from rising treasury yields, which peaked at 1.19% - the highest levels since March 2020.

Oil back to pre-pandemic levels

The price of oil has recovered to pre-pandemic levels for the first time, even though demand remains lower than normal.

West Texas Intermediate (WTI) – a benchmark for US oil – last week rose above $55 per barrel for the first time in over a year.

Demand has been rising globally, particularly in Asia, though supply restrictions announced by oil-producing nations such as Saudi Arabia have pushed up prices.

Gold sliding

Gold ended Friday at a value of US$1,805 per ounce, rebounding $20 from a two-month low on Thursday.

However, the trend for the metal is generally downwards, having declined in worth in four of the first five weeks of 2021.  

The week ahead

The focus this week will continue to be on the worldwide vaccine rollout though European industrial figures will be looked at with some interest.

German figures released this morning were lower than expected, rising only 0.3% to a flat 0% rate of growth.

Economic data  

Highlights this week include:

Today (8 February)

  • Industrial production figures from Germany and Spain
  • Speech from:
    • ECB president Lagarde

Tuesday         

  • Industrial production figures from Italy
  • Speech from:
    • Federal Reserve (Fed) regional president Bullard 

Wednesday   

  • Inflation data from Germany
  • Inflation data from the US

Thursday        

  • US jobless claims figures

Friday              

  • UK GDP and industrial production data