The pound has risen against many of its peers this week as Governor Bailey of the Bank of England indicated there were ‘a lot of issues’ around the prospect of negative interest rates.
Such a move has been loosely priced into the value of sterling since despite a Brexit deal removing the uncertainty of a disorderly no-deal relationship with the EU, the new lockdown which came into force last week will have sapped economic confidence and growth.
The UK economy could now be in store for another quarter of negative growth, where the lockdown restrictions prevent business activity which may have given the Bank of England reason to consider dropping the base rate below it’s already historic low of 0.1%.
However, yesterday Governor Bailey gently swerved this immediate prospect although it does remain a distinct possibility and what perhaps will be interesting now is the economic data news, which will provide the Bank of England’s policymakers with their information to make a decision.
Sterling like many currencies is sensitive to interest rate and monetary policy by the central bank and any variation, or twist and turn in sentiment towards the negative rate policy and also further stimulus by way of Quantitative Easing (QE) could trigger volatility ahead of the next Bank of England meeting on the 4th February.
Whilst the meeting is four weeks away tomorrow, we could still see volatility ahead of the event just like we saw yesterday, as investors debate and place bets as to which way future policy will go.
>h2>Will the US Dollar Weaker Further and What Else Will Move the Pound Ahead?
The US dollar has been much weaker in 2021, having lost around 6% against the pound between the end of October when the interbank rate was 1.29 and it’s 1.36’s as we began 2021.
Yesterday was another spike for the pound with the GBPUSD level rising towards the 1.37 mark and it has certainly been over that amount today. This is partly a stronger pound, but also owing to speculation that the US Democrats will be looking to undertake an extensive stimulus program which would see increased confidence for global markets.
Confidence has been a key theme in the currency market with the progress made with vaccines for COVID-19 helping to improve global risk sentiment, and encouraging investors to buy stocks and also to invest in potentially more risky assets.
Such behaviour has weakened the US dollar since it is a safe haven currency that strengthens in time of uncertainty. The opposite is currently true in that in a time of increased certainty and increased confidence, the dollar may weaken and it is this trend which is currently in place.
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