Pound popped in morning London dealing after BoE Governor poured cold water on the notion of negative interest rates noting that the idea was “controversial,” explains Boris Schlossberg of BK Asset Management.
Mr. Bailey stated that no country has used negative rates in the retail end of the financial market and that the transmission of negative rates depends on the banking system. Governor Bailey’s aversion to negative rates is consistent with the general attitude of all Anglo-Saxon economies' policy makers who are reluctant to move in such direction given the very high percentage of mortgage holders in the population.
Governor Bailey did add that rates are likely to remain low for a considerable time as demand and productivity growth will remain depressed. Cable shot up on the news supported by a sharper repricing in the UK rates complex but for now the pair remains capped at the 1.3600 level as the UK faces serious economic issues as it grapples with both the ravaging COVID outbreak and the new adjustment of Brexit reality.
The Brexit deal has clearly introduced friction into the UK economy with many supermarkets reporting empty shelves as foodstuffs get delayed at the border due to new customs procedures. The glitches may be temporary, but they will certainly add to both the decline in economic activity and the rise in prices as shortages are sure to drive up supply side costs.
MoneyShow’s Top 100 Stocks for 2021
The top performing newsletter advisors and analyst are back, and they just released their best stock ideas for 2021. Subscribe to our free daily newsletter, Top Pros' Top Picks, and be among the first wave of investors to see our best stock ideas for the new year.
For now, cable trades in a 1.3400-1.3600 band as the market observes the adjustment period.
Elsewhere the price action was more subdued with equity indices rebounding slightly after yesterday’s selloff, but the downside pressure is likely to remain. One reason for the pressure on stocks is the rise in US yields with 10-year now firmly above the 1% level as it pushes higher to 115 basis points. The yields on bonds remain miniscule, but in capital markets the action is always relative not absolute and given the jump in yields the sky-high valuations in equities may need to compress.
The eco calendar is generally quiet today with only JOLTS and economic optimism on the docket so the flows will likely be driven by cross-market action and any fresh developments out of Washington DC.
By Boris Schlossberg, Co-Founder, BKForex.com