IFX Market Report: Tuesday 12th January 2021

During a virtual speech at UWE Bristol yesterday, external member of the Bank of England’s (BoE) Monetary Policy Committee (MPC) Silvana Tenreyro reiterated her argument that negative interest rates could have a positive impact if imposed. Tenreyro stated that while “there is no clear evidence that negative rates have reduced bank profits overall, and a number of studies find positive impacts, once you take into account the boost to the economy”. She went on to add that ““it is possible that the current structure of the UK banking system could lead to a less positive impact on bank profitability, at worst, in my view, this could only make bank-lending channels slightly less powerful than otherwise, while I expect the financial-market channels to work normally”.

After falling from the 1.36 handle, GBPUSD opened Monday morning at 1.3500. The pair was unable to maintain this position and spent most of the day in the 1.34’s – but in the evening, the pair saw a sharp spike and was able to close at 1.3522.

GBPEUR was also able to catch some upside in Monday’s session. The pair started the day at 1.1072 and was able to close above 1.11 at 1.1112.

As for EURUSD, the Dollar has pressed on and continues to drive the rate lower. The pair started the week at 1.2192 and finished Monday at 1.2168. This will likely continue while the Fed tolerates the increase in long-term interest rates as reflected by higher Treasury yields.

After Tenreyro’s speech yesterday, speculation on if / when the BoE will take interest rates to negative territory has certainly grown. Despite the excitement, many economists believe the central bank will not make a move this early in 2021. An ING Economics report notes that “while the short-term outlook is incredibly bleak, the prospects for the recovery have improved since the Bank of England's last meeting in November. We therefore think the Bank will opt against a move to negative rates in February”. Another report from Pantheon Macroeconomics said that “investors see little chance of immediate action from the MPC, but it is pricing in a 10bp decline in bank rate, from its current 0.10% level, by the Committee’s meeting on August 5”. The report also notes that while the “probability of easing is unchanged since early December, even though a no-deal Brexit has been averted, due to the major deterioration in the UK’s COVID-19 situation”.

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