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Sterling had one of its better weeks of late after the Bank of England confirmed it is not yet moving towards setting negative interest rates.

It will instead continue with quantitative easing as its major tool to support the UK’s economic recovery from the coronavirus pandemic. Interest rates are already at their lowest ever level of 0.1%.

Commentators suggest negative interest rates can harm banks’ lending capabilities, encourage saver hoarding and cause financial instability.

However, the European Central Bank has previously used negative rates to discourage banks from parking excess reserves in central banks, making them more likely to lend at positive but low rates.

Good week for the pound

The news saw pound sterling hold at its recent levels against the US dollar – its highest since the pandemic began in March.

The pound was valuing between the 1.30-1.32 level against the dollar towards the end of last week, and UK employment and Q2 GDP figures released tomorrow and Wednesday could determine which side of the 1.30-1.32 barrier it will go next.

The 1.32 value has been a formidable barrier for the pound of late, leading to some caution among currency buyers.

EU softens trade deal stance

Media reports that the EU is softening its stance on level playing field rules also supported sterling.

There are increased hopes that a skeleton agreement could be reached in the early autumn, though markets aren’t expecting anything decisive till the EU leaders’ summit in October.

Buyers are also wary of the EU’s track record for securing deals at the last minute, and the sterling-to-euro rate remained around 1.11 throughout the week.

Euro bounce runs out of steam

The euro rally that followed the agreement of the EU economic recovery fund at the end of July has started to run out of steam.

The euro had bounced from a low against the US dollar of around 1.13 in mid-July to a high of 1.19 at the middle of last week, prompting some profit-taking selling. It ended the week at around 1.17.

Hopes for V-shaped global recovery

In the US last week, the latest economic and employment data led to hopes of a V-shaped recovery for the global economy.

The Dow Jones Industrial Average (DJIA) index ended the week strongly at 27,433.48 after it was reported that 1.76m jobs were created in the US last month, resulting in a lower than expected unemployment rate of 10.2% in July. The DJIA had previously slipped below the 27,000 level for much of July.

Reduced demand for safe-haven dollars

This recovery has supported equity markets and reduced demand for safe-haven dollars. The DXY also recovered from a midweek fall to end the week in the middle of its 92.50-94.00 range.

President Trump signed off further stimulus measures to support equity markets, but continued deadlock in Washington relating to further economic stimuli could undermine a generally positive week for the dollar going forwards.

Oil

Oil started to slide from levels of US$45.3 per barrel in the middle of the week to around US$42. The decline is due to a growing anticipation of reduced compliance to previous price cuts and an expected increase of OPEC+ production in the near future.

Gold

Gold continued to solidify at its recent sky-high values, exceeding the US$2000 level. This is due to the fear of inflation as economies continue to grapple with the impact of the coronavirus pandemic.

It has come slightly down from an all-time high of US$2075 due to the dollar regaining some of its strength last week.

Economic data: this week’s highlights 

Today – 10 August

• EU Sentix Investor Confidence survey and US Jolts Job Openings

Tuesday   

• UK employment report
• German ZEW Sentiment survey
• EIA short term energy outlook
• US PPI data for July

Wednesday 

• UK Q2 GDP
• Manufacturing and industrial production figures for June
• EU industrial production
• US inflation data for July
• US crude oil inventories

Thursday   

• German inflation report
• US weekly and continuing jobless claims figures

Friday     

• EU employment and GDP releases
• US retails sales data for July
• Industrial and manufacturing production
• Michigan Consumer sentiment survey