The pound rallied initially yesterday as Bank of England Governor Andrew Bailey played down the prospect of negative interest rates.

Following the Monetary Policy Committee’s meeting last week, markets had begun pricing in a cut in the UK interest rate for Q1 next year. The bank confirmed that the option of negative or zero interest rates was still being considered and as such the pound drifted lower. However, Bailey was keen to clarify the situation yesterday and made clear that whilst the bank has the option of cutting interest rates further, he questioned the effectiveness of additional rate cuts and referenced other states.

Sterling Gains Short-lived

Sterling Gains Short-lived

Zero or negative interest rates discourage inward investment so Bailey’s comments saw the pound rally against both the euro and US dollar although gains were short lived as it wasn’t long before Prime Minister Johnson laid out a series of new coronavirus restrictions to deal with the recent increase in coronavirus cases. Boris confirmed that restrictions could be in place for up to 6 months as the UK fights to bring coronavirus cases under control. The prime minister said too many are flouting the rules and appealed for discipline. The news resulted in the pound falling as investors concern increased over the outlook for the UK economy.

Chris Whitty, the UK’s Chief Scientist, said on Monday that coronavirus cases could reach 50,000 per day by mid-October if the government does not act quickly and that the death toll could reach 200 per day. To put that death toll into context, there are approximately 200 people per day that die from dementia, 200 people that die per day from pneumonia, 400 people that die per day from the flu, and 450 people that die per day from cancer, although the latter is now expected to rise as treatment and diagnosis services continue to suffer. It is also worth highlighting that the average age of a coronavirus victim is 82 in the UK. Hence the question, would the government be better to target those most at risk than to blanket approach the whole country and economy against a virus that has a survival rate of 99.9 percent?

All Focus on Brexit

Meanwhile, ongoing Brexit negotiations look set to continue to be the main drive behind the pound’s direction. Michel Barnier is London this week for preliminary talks with David Frost in advance of another round of negotiations next week, which could prove crucial if Boris Johnson’s deadline of October 15th is to be met.

Whilst the last round of talks was overshadowed by the UK’s Internal Market Bill, officials reported they were pleasantly surprised by how much progress was made in various technical areas although the UK and EU are still some way from breaking the deadlock. The two key areas of dispute remain the EU’s access to UK fishing waters and the EU’s demand for a level playing field.

It has been mentioned by EU diplomats that the EU could be willing to accept less strict level playing field guarantees if the UK signs up to a more comprehensive governance structure although the EU would want all aspects of the relationship included here including fishing. The EU has suggested the ECJ would not necessarily need to be the ultimate dispute resolution although the UK is refusing to sign up to any treaty that would prevent it from operating as sovereign state. The current level playing field would see the UK follow EU law regarding state aid, tax, labour law and environmental standards.

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