The pound rallied as traders pushed back expectations for when the Bank of England might cut borrowing costs to the end of the year, after Governor Andrew Bailey said there were a lot of issues with negative rates.Sterling broke above $1.36, gilt yields rose and money markets moved pricing for a 10-basis-point rate cut to December from August on Monday. The comments by Bailey, reported by Reuters, damped speculation that a rate move to 0% could come as soon as next month. Goldman Sachs Group Inc (NYSE:GS). strategists had put those odds at 4-to-1.
“The pound is regaining ground as rates markets are paring back rate cut bets ahead of the February policy meeting,” said Valentin Marinov, head of Group-of-10 foreign-exchange research and strategy at Credit Agricole (OTC:CRARY) SA. “Any rebounds in the GBP represent a selling opportunity at current levels.”
The pound was up 0.5% to $1.3585 as of 10:53 a.m. in London. Against the euro it reached its strongest since the New Year at 89.38 pence. Ten-year U.K. bond yields rose three basis points to 0.34%.
With a Brexit deal reached, pound traders are shifting their focus to the outlook for the U.K. economy, which has returned to lockdown amid a resurgence in coronavirus cases. While Bailey said the economy was in a difficult period, Deputy Governor Ben Broadbent said it could be stronger than output data suggest as consumers switched their spending in response to the pandemic.
That was a more positive take than policy maker Silvana Tenreyro’s comments on Monday signaling the central bank may need to provide additional easing, while maintaining the option of pushing rates into negative territory.
The European Central Bank has its benchmark rate at -0.5%, but there are concerns about the profitability of Britain’s banking sector should U.K. borrowing costs be cut further.