September 29
Trading the GBP involves balancing current Brexit optimism on a trade deal between the EU and the UK vs the wider monetary policy of the UK.
Policymaker Silvana Tenreyro said in an interview over the weekend that she did not expect Britain to experience a fast V-shaped recovery for three reasons. Firstly,due to headwinds from local flare-ups in COVID-19, secondly due to rising unemployment and finally due to a weak global economic outlook. See here.
In August the BoE said it was taking a closer look at the case for negative interest rates and in September it said said the Monetary Policy Committee had been briefed on the BoE's plans to explore how a negative bank rate could be implemented effectively. This headline meant that money markets brought forward expectations on UK interest rates turning negative. Negative rates were now seen as appearing in Feb 2012 after the meeting vs March 2021 prior to the meeting.
The expectations of a move towards negative interest rates has increased further since Tenreyro said that evidence from Europe and Japan showed that cutting interest rates below zero had shown some elements of succeess. Namely that they had succeeded in cutting the cost for companies to borrow money and yet still did not make it unprofitable for banks to lend.
We can add to this the risks of unemployment rising sharply in the UK over the next couple of months as the furlough scheme is ending and the job retention scheme is limited in its scope Furthermore, Brexit negotiations are ongoing and there is still likely to be ups and downs in the GBP as these negotiations remain.
This should result in a clear GBP sell right? However, the one spanner to clear GBP downside is a last minute Brexit deal. The timescale for a deal to be arranged remains to be for the end of October, so we are getting on towards the steps of the court to make a deal.If there can be a breakthrough expect the GBP to surge higher as negotiations move on.
