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GBP Unfazed Despite Negative Rate Speculation/Brexit Showdown




GBP has been on the front foot so far today, amidst a decent improvement in the market’s appetite for risk. Spurring better sentiment this morning has mainly been three main factors; 


1) Fed Chair Powell was very dovish on Sunday, hinting that more stimulus is to come. 


2) The global economy continues to reopen (weekend reports focused on California being 75% reopen now). 


3) US Pharmaceutical Company Moderna released Phase 1 trial results for its Covid-19 vaccine. 


The fact that GBP would be supported by these stories should not come as a surprise (GBP is known to be risk-sensitive). 


What comes as a surprise is the lack of GBP volatility we saw earlier on this morning despite these two important stories that broke over the weekend....


1) Various UK papers reported that the EU is ready to back down from its hard line position on fishing rights next month, according to senior sources in Brussels. Under the EU’s current demands, which are supported by France, Spain, Belgium and the Netherlands, the UK would be effectively required to offer European fishermen the same access to UK waters as required by EU membership. The UK has refused to agree to such conditions and this has been a sticking point in negotiations. Now, senior European diplomats have reportedly admitted they need to get ‘realistic’ about their position on fishing. 


Should the EU soften their position on UK fisheries, this could be a big step towards a deal eventually being made. Once the EU moves to a softer position, this will open the door for the UK to slightly soften their positions, raising the possibility that, regarding this issue, a middle ground may be able to be found. 


This story, in my mind, ought to have been a GBP positive, but as noted above, in early trade this week, GBP was very subdued. 



2) Separately, the Bank of England’s chief economist Haldane over the weekend indicated that emergency measures, including negative interest rates could be on the cards to help alleviate the economic slump caused by the Covid-19 pandemic. Haldane said pushing interest rates below zero, as well as buying riskier assets under the central bank’s bond-purchase programme, could not be ruled out. 


The comments have increased speculation over what would be an unprecedented move for the Bank. Money markets are now pricing a decent probability that the BoE will, in the coming months, move interest rates from their current 0.1% levels into negative territory. 


Haldane’s interview follows an attempt to play down the prospect of negative rates by BoE Governor Bailey earlier in the week. He said “it is not something we are currently planning for or contemplating.” However, he said it would be unwise to rule anything out, “particularly in these circumstances”. 


This story ought to have been a GBP negative if you ask me. Perhaps GBP’s lack of volatility this morning was because these two cancelled each other out. 


Either way, do not let GBPs lack of volatility today on these themes fool you. Both of these stories will be key for GBP going forward; if a Brexit deal can be made, this would remove a big downside risk for the UK economy. Meanwhile, if the BoE was to go negative, this could weigh heavily on GBP. 


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