The pound is on the ropes

Last night we heard from the Bank of England, and for this time round monetary policy was relatively unchanged. Their assessment of the broader economic adversity that the United Kingdom is currently enduring was found to be similar to that of the August meeting. There was no indication on near term policy changes for the November meeting, but the bank did provide some insight into their considerations for Brexit. Interestingly, and likely though of as out of touch by investors, the central bank has based its possible actions off a comprehensive trade deal with the European Union.

The central bank also increased its communications on negative interest rates, the talk sent the pound down to its intraday low with a 0.7% drop. The likely hood of rates moving into negative territory before year end is an unlikely scenario for me. I would hope that policy makers have the foresight and the insight to know that any major policy changes should be kept as an ace in the sleeve. Logically waiting for a finalized trade agreement between the EU and the UK would be the most supportive option. Adjusting rates to early will very well cause harm to the FX rate advantage that the UK is currently benefitting from. Applying an interest rate cut to negative will decimate that advantage and cause more harm to the UK economy than it is already suffering.

In the coming weeks, I still see the Brexit negotiations as the main influence of the Great British Pounds behavior. Discernable trade agreement terms will be the chief catalyst to the UK economy for the next 10-15 years. As hopes have been dwindling for a deal to occur, price has been softening for the GBP, some of the damage has already been done, but further downside risks are likely to batter it further, and negative rate talk won’t help it.

GBPUSD 4 Hourly – a greased slide for the pound