Sterling soars as Bailey talks down negative interest rates

Sterling continues to hold up remarkably well in the face of the worsening pandemic situation in the UK and indeed overseas.

The pound leapt higher yesterday, rallying by over one percent versus the US dollar following comments from Bank of England governor Andrew Bailey. While he stated that the UK economy was facing its ‘darkest hour’ amid another nationwide lockdown, investors were encouraged by an apparent lack of appetite for negative interest rates. According to Bailey there were ‘a lot of issues’ with sub-zero rates, and that it was too soon to talk about the need for additional stimulus measures.

Bailey did, however, strike an optimistic note on the recovery, saying that the UK economy would bounce back broadly as it did last year once lockdown measures are gradually lifted. With more than 4% of the population now having received at least one dose of either the Pfizer of AstraZeneca vaccine, and with the pace of vaccinations accelerating every day, we remain hopeful that we could see this unwinding by the spring. This is, of course, very much dependent on the impact of the lockdown in suppressing caseloads. New daily cases fell to a two-week low yesterday, although it is far too soon to draw any conclusion from this.

German lockdown warnings raise ‘double dip’ recession concerns

Much like with sterling, euro traders are continuing to take the doom and gloom pandemic headlines in their stride. German chancellor Angela Merkel warned on Tuesday that lockdown measures could last for another 8 to 10 weeks in the country, i.e possibly through to the end of March. This is a big concern for the Euro Area economy and if this indeed turns out to be the case, we would almost certainly see another quarter of contraction and a ‘double dip’ recession in the common bloc.

While the latest virus numbers appear to have stabilised in Germany, this has a lot to do with a sharp decrease in testing. As of 3rd January, Germany was conducting just 1.35 tests per 1,000 people, half of that conducted in early-November and more than five times less than that currently being carried out in the UK. Deaths caused by the virus in Europe’s largest country have continued on a worrisome upward trajectory, with the one-week moving average now around the 1,000 mark, four times higher than the peak in April. The euro has, however, continued to hold firm, stabilising around the 1.22 level versus the US dollar this morning.