Sterling Jumps on BoE Comments, Dollar Softens as Stocks Rebound

Sterling rises broadly today after BoE Deputy Governor indicated that negative interest rate is not imminent. Rebound in the Pound somewhat lifts other European majors too. Australian Dollar is following as the second strongest for now, with help from rebound in stocks. Dollar is trading broadly lower, paring last week’s gain while Canadian follows as second weakest.

Technically, EUR/GBP’s break of 0.9067 minor support is a positive development for Sterling. Though, we’d prefer to see break of 1.3007 resistance in GBP/USD and 136.46 resistance in GBP/JPY to confirm the underlying strengthen. The Pound is, after all, still facing risk of return to coronavirus lockdown and no-deal Brexit.

In Europe, currently FTSE is up 1.82%. DAX is up 3.16%. CAC is up 2.48%. Germany 10-year yield is up 0.0147 at -0.512. Earlier in Asia, Nikkei rose 1.32%. Hong Kong HSI rose 1.04%. China Shanghai SSE dropped -0.06%. Singapore Strait Times rose 0.43%. Japan 10-year JGB yield rose 0.0133 to 0.026.

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BoE Ramsden sees 0.1% as effective lower bound in interest rates

Sterling is given a lift by BoE Deputy Governor Dave Ramsden’s comment in an interview with the Society of Profession Economists. He said, “for me, I see the effective lower bound still at 0.1 which is where Bank Rate is at present”. Negatives rates are “in the toolbox” and BoE is just “duty bound” to explore in more details the operational considerations. Engagement with banks on negative rates will “take time”.

On the economy, he said that the central cases sees GDP “recovering steadily” but there are “real uncertainties and risks”, from the pandemic, Brexit and the US election. BoE is “ready to act further if needed”. He’s also concerned that unemployment rate could rise further than BoE’s central case. “For me, when we’re looking at unemployment, it is more likely that unemployment will end up peaking higher than 7.5% than lower, and it will end up coming down more gradually,” he said.

BoE Tenreyro: Evidence of negative rates has been encouraging

BoE policymaker Silvana Tenreyro said in a Sunday Telegraph interview that the evidence from negative interest rates in Eurozone and Japan “has been encouraging”. Negative rates had succeeded in lowering companies’ borrowing costs while maintaining bank’s profitability.

“There has been almost full pass-through of negative rates into lending rates in most countries,” she added. “Banks adapted well – their profitability increased with negative rates largely because impairments and loss provisions have decreased with the boost to activity and the increase in asset prices.”

The V-shaped recovery in the UK economy is threatened by resurgence of infections locally, and a weak global economy. “Flare-ups like we’re seeing may potentially lead to more localized lockdowns and will keep interrupting that V,” she said. “Another factor interrupting the V is a very weak global outlook, with high uncertainties, particularly with a second wave already striking many countries.”

Swiss Q2 GDP contraction revised up to -7.3% on benchmark revision

Swiss GDP contraction in Q2 was revised to -7.3%, up from -8.2%, after “benchmark revision” based on international recommendations” . SECO noted, though, “he interpretation of this data from an economic perspective is remaining largely unchanged.”

“As well as the decision to ease public health restrictions relatively early, the industry mix in the Swiss economy also helped to prevent an even more drastic slump in GDP,” SECO added. In particular, the 0.3% increase in chemical and pharmaceutical industry stabilized the result for manufacturing as a whole:.

Still, demand fell across the board, with private consumption down 08.1% in the wake of the pandemic and the containment measures. Equipment investment dropped -10.0%. Exports dropped -6.5% while services dropped -15.3%.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2686; (P) 1.2745; (R1) 1.2803; More….

GBP/USD rebounds strongly today but stays below 1.3007 resistance. Intraday bias remains neutral for the moment. Further decline is expected as long as 1.3007 resistance holds. On the downside, sustained break of 38.2% retracement of 1.1409 to 1.3482 at 1.2690 will argue that the rise from 1.1409 might be completed, and bring deeper fall to 61.8% retracement at 1.2201. However, break of 1.3007 resistance will suggest that decline from 1.3482 is merely a corrective move, and turn bias back to the upside for retesting 1.3482.

In the bigger picture, while the rebound from 1.1409 was strong, it’s limited by both 1.3514 resistance, as well as 55 month EMA (now at 1.3317). The development keeps outlook bearish. Sustained break of 55 week EMA (now at 1.2749) will add to medium term bearishness for a new low below 1.1409 at a later stage, resuming the down trend from 2.1161 (2007 high).

Economic Indicators Update