Pound to Dollar Rates Propelled Towards 1.37 Level

Andrew Bailey struck a cautious tone yesterday in an online speech to the Scottish Chambers of Commerce. The Bank of England governor told his audience that the latest COVID-19 lockdown means the economy is in a “very difficult period” – which is likely to delay the recovery. In comments that echoed chancellor, Rishi Sunak’s it’s “going to get worse before it gets better” outlook on Monday, Mr Bailey said the economy would rebound but only once the lockdown ends and the virus recedes: “[We’re] in a very difficult period at the moment and there’s no question that it’s going to delay, probably, the trajectory,” he said.

But it was his comments about the cost of borrowing in the UK that had the biggest impact on the pound. The debate over whether to introduce negative interest rates intensified when Mr Bailey indicated that cutting rates to sub-zero levels was not likely anytime soon. His stance on the issue places him on the opposite side of the fence to fellow MPC member Silvana Tenreyro – a champion of proactive monetary policy – who stated publicly that negative interest rates could benefit the economy.

The pound reacted by moving above the 1.36 level against the dollar – and maintained its upward trajectory into this morning, where it finds itself on the cusp of the elusive 1.37 benchmark. The pair was helped higher overnight by a triumvirate of factors: an increase in the UK’s vaccination campaign, tentative signs that COVID-19 infection rates are peaking in London, and dollar weakness.

With the post-Brexit deal largely in the pound’s rear-view mirror, for the time being, investors are focusing on the pandemic’s impact on the UK economy. As the vaccine process ramps up – the UK is on course to vaccinate 15 million of the most vulnerable members of society by mid-February – so do hopes of an economic recovery from March onwards, once lockdown restrictions are potentially lifted.

Stimulus Expectations Continue to Weigh on Dollar

The dollar’s gains from the start of the week were eroded yesterday by rising US Treasury yields, which climbed to its highest level since March, as investors contemplate the possibility of further economic stimulus – lending further support to the pound to dollar rate. The movement in yields was sparked last week when President-elect Joe Biden pledged additional economic stimulus “in the trillions of dollars” – details of which will be made clear in a formal announcement tomorrow.

Looking Ahead

With no economic releases or speeches scheduled in the UK today, investors will focus on the US, where a slew of data is dominated by the Consumer Price Index excluding food and energy – a measure of price movements by comparing the retail prices of a representative shopping basket of goods and services.

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