Pound Climbs as Market Pushes Back on Negative Rates Speculation
A British one pound coin sits with a U.S. one dollar bills in this arranged photograph in London, U.K. (Photographer: Jason Alden/Bloomberg)

Pound Climbs as Market Pushes Back on Negative Rates Speculation

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The pound rallied as traders pushed back expectations for when the Bank of England might cut borrowing costs to the end of the year, after Governor Andrew Bailey said there were a lot of issues with negative rates.

Sterling broke above $1.36, gilt yields rose and money markets moved pricing for a 10-basis-point rate cut to December from August on Monday. The comments by Bailey damped speculation that a rate move to 0% could come as soon as next month. Goldman Sachs Group Inc. strategists had put those odds at 4-to-1.

Pound Climbs as Market Pushes Back on Negative Rates Speculation

“The pound is regaining ground as rates markets are paring back rate cut bets ahead of the February policy meeting,” said Valentin Marinov, head of Group-of-10 foreign-exchange research and strategy at Credit Agricole SA. “Any rebounds in the GBP represent a selling opportunity at current levels.”

The pound was up 0.8% to $1.3621 as of 4:02 p.m. in London, with the dollar weakening across the board. Against the euro it reached its strongest since November at 89.21 pence. Ten-year U.K. bond yields rose five basis points to 0.36%, the highest since early December.

With a Brexit trade deal reached, pound investors are shifting their focus to the outlook for the U.K. economy, which has returned to lockdown amid a resurgence in coronavirus cases. While Bailey said the economy was in a difficult period, Deputy Governor Ben Broadbent thinks it could be stronger than output data suggest as consumers switched their spending in response to the pandemic.

That was a more positive take than policy maker Silvana Tenreyro’s comments on Monday signaling the central bank may need to provide additional easing, while maintaining the option of pushing rates into negative territory.

The European Central Bank has its benchmark rate at -0.5%, but there are concerns about the profitability of Britain’s banking sector should U.K. borrowing costs be cut further. The U.K. will start talks with the EU this week on how regulators will cooperate on financial services.

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