FX week ahead: Will BoE moves towards negative interest rates and weakens the GBP further?
|Brexit’s back with a vengeance! This week saw the specter of Brexit headlines return. The latest move by PM Johnson in bringing a new internal market bill to the UK Parliament has increased the tensions between the EU and the UK. The new bill threatens to undermine the already agreed Withdrawal Agreement from January 2020 and has the EU mulling over a legal response to the UK’s plan. This resulted in significant pressure for the GBP this week and we can expect more GBP volatility heading into the middle of October. Expect GBP sellers as long as this scenario remains.
Key events from the past week
CAD: BOC rate decision, Sep 09. The BOC kept rates unchanged at 0.25bps and the QE purchasing of Canadian Gov’t bonds is set to remain at levels of at least C$5 billion per week. The BoC saw the Canadian economy developing broadly in line with June’s projections.
EUR: ECB rate decision, Sep 10. The ECB revised their growth projections higher for 2020 to -8.0% and inflation expectations for 2021 were revised up to 1.0%. President Lagarde also seems relatively unfazed by the recent euro strength. This more optimistic response supported the EURUSD this week.
GBP: The UK finally remembers Brexit: Sep 09. The GBP had been trading strangely over the last few weeks. It continued to defy gravity with the GBPUSD pair reaching as high as 1.3500. However, with UK Parliamentary recess over, the GBP was sold heavily this week on the prospect of a ‘no-deal’ Brexit.
Key events for the coming week
USD: Fed rate decision, Sep16. The key question here for the FED is whether they will adopt yield curve control or move towards negative interest rates. Any positive move towards these to policy tools will weaken the USD.
GBP: BoE rate decision, Sep 17. The BoE faces multiple pressures: Rising COVID-19 cases, Brexit risks, and a slew of businesses likely to struggle with debt repayment into year-end and beyond. Will this force the Bank of England to move towards negative interest rates and weaken the GBP further?
AUD: Employment data, Sep 17. The AUD has been supported on higher commodity prices and a continued recovery in global growth over the last few weeks. A strong employment print will be helpful in supporting further AUDNZD upside towards 1.10.
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