12/01/2021

Sterling remains subdued as negative interest rates loom


GBP

The pound was among the riskier assets damaged by a strong recovering dollar yesterday as investors weighed up the risk of the Bank of England moving towards negative rates.

The pound has dropped against both the dollar and euro so far this month, the last-minute Brexit deal that was reached in late December has been quickly overshadowed by tighter lockdown measures to combat the spread of a new variant of COVID-19. The UK’s Chief Medical Officer Chris Witty has stated the next few weeks of the pandemic will be the worst so far in terms of people being admitted to hospital.

Currency markets are now beginning to price in negative interest rates for the UK as early as May 2021, compared with an August estimate just after the Brexit trade deal was struck last month.

USD

The dollar moved higher across the board yesterday, extending its rebound from the near three-year low hit last week, taking strength from the recent spike in Treasury yields and the prospect of a growth boost from higher US fiscal stimulus.

Democratic US president-elect Joe Biden, who officially becomes president on 20th January, has his party now controlling both houses of Congress and has promised trillions in extra pandemic-relief spending. Usually the extra spending plans would move investors to worry about rising inflation and its detrimental effect on the US dollar in a weak economy, but the currency has been supported in recent weeks thanks to rising US yields.


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