Pound jumps on Bailey rate comments

The British pound has bounced back on Tuesday, after starting the week with losses. Currently, GBP/USD is trading at 1.3622, up 0.79% on the day.

BoE Governor nixes negative interest rates

It’s all quiet on the fundamental front, with no tier-1 data until Friday, with the release of GDP and Manufacturing Production. With a lack of significant economic data, market focus shifted to the Bank of England, as BoE Governor Bailey made some remarks earlier in the day on interest rates which were bullish for the British pound. Bailey was responding to comments on Monday by Silvana Tenreyro, a voting member of the bank. Tenreyo raised eyebrows when she said that negative rates could provide significant stimulus to the economy. She cited the central banks of Japan and Switzerland, which have implemented negative rates. Tenreyo’s bombshell comment was that the BoE was studying the feasibility of negative rates.

One of the last things that investors want to hear is negative rates, and the pound headed lower after Tenreyo’s comments. BoE Governor Bailey was forced to do some damage control on Tuesday, as he poured cold water on the notion that the BoE was considering negative rates. Bailey called the notion “controversial” and added that he expected rates to remain at very low levels for some time. The markets appreciated the about-face and the pound responded with gains. This is not the first time that the British pound has dropped on reports that the BoE was considering negative rates and then rebounded once Bailey dismissed these reports. The BoE Governor also noted that he believed that the unemployment rate was actually at 6.5%, much higher than the official rate of 4.9%, and that he expected the second wave of Covid-19 to hamper economic activity. Investors, however, chose to ignore this sober message and have given the pound a convincing thumbs-up on Tuesday.

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GBP/USD Technical

• GBP/USD is pressing on resistance at 1.3635. Above, there is resistance at 1.3696
• 1.3574 has switched to a support role. Below, there is support at 1.3452
• The pair easily broke above the 20-day MA line in the Asian session. This is an upward sign for the pair

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