The pound against the US Dollar has returned 11.4% since its March lows. As well all know, a lot has happened since March. But what has not come to fruition is the Brexit talks. As the transition deadline for the UK to leave the EU approaches, Brexit talks have suddenly come back into the spotlight. However, Prime Minister Boris Johnson has thrown a wrench in the Brexit negotiations, threatening to break international law by passing local legislation to override certain parts of the Brexit deal.
The pound has been extremely volatile to these negotiations and developments with the Coronavirus. Yesterday, the Bank of England held interest rates at 0.1%, alongside stating that they explored how negative rates might be implemented. The pound dropped 0.6% against the US dollar, touching 1.28663. Petr Krapta, currency strategist at ING, stated that “they were exploring how negative bank rates could be implemented effectively, should the outlook for inflation and output warrant it at some point.
JP Morgan analysts weren’t too excited by the BoE’s announcement, stating that “there was little to be gained from taking action today” and that “should it need to react at a later date, the Bank will benefit from a little extra firepower left at its disposal having not wasted it today”
Brexit – or what doesn’t happen with Brexit. Currently, the EU has given the government until the end of the month to scrap the law they had proposed, or face legal action. Furthermore, they have till December to exit the EU properly as their transition period ends. These two factors have pushed the price of betting against the pound has skyrocketed. Therefore, being bullish on the pound has become cheap. Positive sentiment regarding a softer Brexit and progress on negotiations should push the pound higher.
Second factor: Of course, the Coronavirus. If the pandemic levels off, and economic damage is not as bad as it seems, the BoE may not implement negative rates and may push the pound higher.
Currently, the markets have not priced in the effect of negative rates. However, that may change as we get closer to crucial Brexit deadlines.