Following Governor of the Bank of England Andrew Bailey's playing down the prospect of negative interest rates for the U.K last week the likelihood of this becoming a reality increased over the weekend as one of the policymakers suggested that this course of action had worked in other areas around the world.
Slivana Tenreyro, an external member of the monetary policy committee suggested that evidence from other European countries and Japan have shown that it can work, in an interview with the Sunday Telegraph.
Negative interest rates should generally lead to consumers spending more rather than saving and the BOE have been consistent in their approach of late that this remains a tool in the box should they need to use it.
An interest rate can impact the exchange rate of a currency as it can make it more or less attractive to investors, so when there is a drop in interest rates or even an increase in the chance of a drop in the near future it can weaken the currency concerned, equally, should the likelihood of a rate hike increase then you can see that particular currency follow suit and gain value.
The next Bank of England Interest rate decision is Thursday 5th November so there is still plenty of time for this sage to play out, and it is also likely that we will hear much more on this subject in the coming weeks.
With the number of Covid-19 cases in the U.K rising along with the chance of a second lockdown also becoming increasingly likely the BOE may have to take drastic action to keep the economy stable, but they also need to be wary of using all the tools in their armoury too early, which is why there is a disparity between members at this current stage.
Brexit talks will continue this week with Chief EU negotiator Michel barnier and Lord David Frost set to meet on Tuesday with the hope of edging closer to a deal over the course of the week.
For those that have been following sterling exchange rates recently, and indeed over the past few years Brexit has been one of the key players in the value of the pound.
Any increase in the likelihood of a no deal Brexit has generally led to weakness for the pound and whenever sentiment for a deal happening improves so does the value of the pound too.
Reports over the weekend have suggested that both sides have made key concessions and may actually have a chance of getting something over the line, so if you are in the process of buying foreign currency in the coming weeks or months ahead then there may be a buying opportunity arise from this.
My view still remains that I would not be surprised to see some sort of agreement put in place before Boris Johnson’s final date of 15th October (before he will walk away with no deal) even if it is a bare bones agreement that will need to be worked on in the months and possibly even years ahead.
Needless to say, merely by taking a no deal Brexit scenario off the table it would be likely that the pound could have a good run of form. If you are in the position where you have a large purchase coming up however then you still must approach the next few weeks with caution, there have been plenty of occasions over the last few years where Sterling has started to look solid and a Brexit deal has seemingly been edging closer, only for the rug to be pulled from underneath the pounds feet, talks to fall through and the pound to lose ground fairly rapidly.
The week ahead actually brings quite a bit of economic data that may also impact exchange rates. A slow start for data but the week does heat up with U.K GDP (Gross Domestic Product) data or growth figures expected to show a decline for the second quarter of 2020 of over 20%.
Later in the day we have the same release for the U.S with a drop off north of 30% expected. In normal circumstances you would expect both currencies to experience significant weakness with figures like this but these aren’t normal circumstance and the market has come to expect it. Any deviation from expectations though could lead to a volatile Wednesday for the pound or dollar.
In the Eurozone unemployment rates are published on Thursday with a rise to 8.1% expected, and on Friday we have Non-Farm payroll data to round off the week, this data is from the U.S but it can impact all major currencies.
This data can impact all major currencies as it can alter global sentiment and attitude to risk, so be poised for a volatile end to the trading week as Friday afternoon could also bring further news on Brexit talks as mentioned earlier in the report.
If you have a currency exchange coming up in the next few weeks then it is key that you have a proactive and experienced currency broker on your side who can inform you rapidly of market movements in your favour or against you and this is where we can help.
Feel free to get in touch with us today to discuss your requirements and we will be happy to work by your side as a key volatile period approaches.
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