9 November 2020: Sterling awaits rate news

Sterling awaits rate news

9th November: Highlights

  • Banks asked to weigh up effect of negative rates
  • Trump under pressure to go quietly
  • Grip of Coronavirus tightens

Once in negative rates it can be difficult to exit

It is becoming more and more likely that the Bank of England will cut interest rates in the coming weeks and take them into negative territory for the first time.

Bank of England Governor Andrew Bailey has been canvassing the opinion of the banks, who essentially, control the practicalities of the money market, for their views on what the effect will be on their business. Once that review is complete, the MPC will decide.

Having already added a further £150 billion to its bond purchases, it is clear that the Treasury and Central Bank are working in unison to ensure that the country is prepared financially for whatever happens following the current lockdown.

Both Andrew Bailey and his Chief Economist Andrew Haldane will be speaking later today.

Fears are growing across several sectors of the economy that were the present lockdown be followed by another in January, as has been mentioned already, the decimation of businesses could see the economy fall into an abyss that would take more than five years to recover from. That would mean that the current Parliament would have been firefighting for its entirety losing every opportunity for progress.

Last week, the pound danced to the dollar’s tune as financial markets awaited news of the new U.S. President. It traded up to a high of 1.3177, closing at 1.3152.

Despite the overhang of the threat of legal action in the U.S. over the election result (see below), the market will begin to refocus on the economy and the effect of the lockdown and the spread of infections.

With the death toll likely to hit 50k this week, the scientific community will continue to prioritize work on a vaccine which is rumoured to be available before the end of the year, while monitoring the effect of the lockdown on infections.

Data for like-for-like retail sales will be announced tonight with expectations of a rise from 6.4% in September to 8.1% year on year in October unlikely to support Sterling which, unless it is able to create greater momentum for itself, will begin to correct last week’s rise.

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Messy week in prospect as Trump catches litigious virus

Donald Trump was never likely to ride quietly off into the sunset chastened by having lost the election to the 46th U.S. President, Joe Biden.

The sheen continues to be taken off Biden’s victory by what appear to be little more than petulant outbursts from Trump who is apparently still considering his options despite spending the weekend on the golf course.

Assuming the legal actions come to nothing, which is the expected outcome right now, Biden is hoping to bring a sense of unity to the country. Historically Democrat Administrations tend to be more inwards looking than Republicans which is what is needed. A period of contemplation followed by the repair of divisions almost deliberately created by President Trump, will characterize Biden’s first 100 days.

With the Coronavirus pandemic surging across several states as the second wave accelerates, there is concern that Trump will continue to decry its severity and accuracy of data being produced.

As his Administration enters lame duck status, it will be vital that work continues to agree a Pandemic Relief Bill to support those who are most affected by the disease.

Last week’s release of employment data for October showed that 638k new jobs were created down from 672k in September. The Fed will be concerned at slowing job creation. At the latest FOMC meeting which also took place last week, its Chairman, Jerome Powell called on the Government to provide greater support to the economy and warned that it could be repeating the same mistakes that were made in 2008.

Powell is concerned that continued tight fiscal policy will see savings rates dwindle for those who await support from the CARES Act.

This week sees the release of inflation data, but the dollar is most likely to be affected by the mopping up in the aftermath of the election and just how Trump acts in the coming days.

Last week, the dollar index traded between 94.80 and 92.13, closing at 92.27.

Passive attitude leading to self-preservation

Europe has, historically, been a reactive continent, content to wait until it is forced to act before deciding, often too late, what it needs to do.

The current crisis which threatens to engulf the region is a many headed beast which the EU commission appears loath to tackle.

The rising rate of infections that has been barely slowed by the lockdowns taking place in several states means that a full lockdown may be necessary stretching to and perhaps beyond the Holiday Period.

Were that to happen the devastation the Eurozone economy would eventually be complete. With nations like France and Italy together with a few nations in the east hoping that the winter sports season could provide a little respite and perhaps an increase in revenue continued lockdowns will bring further misery to the tourism sector.

There are already concerns that unless a usable vaccine is found and its implementation begun, at least the early part of next year’s holiday season could also be wiped out.

Output data points to a slowing economy across all sectors of the economy, but until the second wave comes under control, the ECB will be continuing to put out fires with a leaky hose.

The euro has begun to rise again threatening to test its recent highs. With the uncertainty created by the U.S. election hopefully coming to an and, ECB concerns over strength of the currency will begin to abate.

Last week, the single currency reached a high of 1.1891, cloning at 1.1878.

This week, there will still be several speeches by ECB Governing Council members accompanied by the ZEW survey on the economy and data for industrial production and preliminary results for Q3 GDP.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”