The pound was able to rise against the US dollar on Wednesday, while falling against the euro. The clouds over sterling continue to gather. A portion of today’s negative came from the inflation data, which fell below 1%, to a 4-year low. This happens at a time when the UK financial authorities are debating negative rates.
The fall in inflation has given rise to speculation in the markets that the Bank of England may soon lower interest rates below zero to support an economy affected by the coronavirus pandemic.
Meanwhile, the fall of the GBP/USD pair was not so extensive. The point here is the dollar’s weakness, as it declined across the entire spectrum of the market by the end of the day.
The British currency has nothing to say against the gaining euro. The euro rose after consumer confidence in the eurozone improved by 3.2 points in May compared with April. Sterling paired with the euro in the moment touched the weakest mark since the end of March – 89.69.
The officials of the English regulator are now carefully studying the experience of other central banks with negative interest rates. However, they do not want to notice how the UK economy responds to the April emergency rate cut in response to the economic shock caused by the spread of COVID-19.
Many global strategists agree that lowering rates below zero in the UK is a bad idea.
“It is impossible to imagine an economy in which negative rates would be worse than in the UK,” wrote Societe Generale.
Rates below zero will push the British currency into the abyss. Sterling is now at the bottom of its recent trading range, as Britain remains one of the pandemic-affected countries with more than 35,000 deaths and nearly 250,000 infected.
There are opinions on the market that suggest that the pound is not so bad. There is really no chance of growth in the short term. However, in the long run, one can hope for the appearance of light at the end of the tunnel.
So, strategists of the Swiss Bank UBS expect the pound to rise against the US dollar by the end of the year to the 1.35 level. This forecast implies a 10% rally from the current levels around 1.22 and strongly contrasts with other opinions on the market. Most analysts write about the British currency’s decline. If we talk about the end of the year, according to a Bloomberg survey, sterling can grow against the dollar to a value as high as 1.26.
UBS believes that Brexit without a trade agreement and talking about negative interest rates in the UK are only short-term risks for the sterling.
If we talk more about these two factors, then the Bank of England in June is likely to announce an increase in QE by 100 billion pounds. Concerns about Brexit are exaggerated. It is unlikely that Britain will leave the EU without an agreement; we have already passed this. It is worth waiting for a low transaction or a small extension of the transition period.
It is also worth paying attention to the weakening dollar. Given the almost zero rates in the US, demand for US currency should decline. The dollar will also be pressured by Federal Reserve measures to alleviate the stress associated with dollar financing.
UBS also drew attention to the fact that the pound remains “deeply underestimated”, and the equilibrium level of GBP/USD for three years ahead is 1.53.