The British pound continued its growth on Tuesday after news that the Bank of England may abandon plans to introduce negative interest rates and is ready to reduce borrowing costs before the end of the year.
Traders have carefully studied the statements of the Governor of the Bank of England, Andrew Bailey, that there are quite a lot of problems with negative interest rates and they are an unacceptable tool for the Central Bank. After that, the British pound rose by more than 100 points from the opening level of the day. The yield on ten-year government bonds also rose by three basis points - 0.34%.
According to Reuters, Andrew Bailey dispelled rumors that an interest rate cut below 0% could occur as early as next month. In this regard, many investors are beginning to review their portfolios in the expectation of further strengthening of the British pound immediately after the problems with the new strain of coronavirus are resolved, and strict quarantine measures are lifted.
Until today, several economists had expected that the Bank of England could introduce negative interest rates as early as this year's February meeting. Immediately after the conclusion of the Brexit deal, many traders now began to pay more attention to the prospects for the recovery of the UK economy, which is in complete paralysis mode due to the continued growth of cases of coronavirus infection. However, not everyone at the Central Bank agrees with Andrew Bailey, who said in an interview that the economy is going through a difficult period. For example, Deputy Governor Ben Broadbent thinks quite differently. However, we will return to it a little later.
The Bank of England may change its monetary policy course by reducing its asset purchase program at the end of the year. After that, the road for buyers of the British pound to new highs will be opened.
Let me remind you that the measures to introduce a negative interest rate on deposits were resorted to quite a long time ago by the European Central Bank, which now keeps it at the level of -0.5%. However, economists at the Central Bank of England have concerns about maintaining the stability and profitability of the UK banking sector if the regulator resorts to such a method.
As noted above, Bank of England Deputy Governor Ben Broadbent said today that the coronavirus pandemic is putting less than expected pressure on inflation, which also cheered buyers of the British pound. Broadbent also drew attention to the fact that the pandemic did not put as much pressure on inflation as previously expected. But, despite this, to expect a steady return of inflation to the target of about 2.0%, the Central Bank will need a fairly long period to keep the asset purchase program and low-interest rates at current levels. The deputy governor also noted that GDP is likely to fall in the 4th quarter of 2020 and also in the 1st quarter of 2021.
I spoke about a similar situation in the European economy this morning. The ongoing recession in 2021 will also be directly linked to a sharp slowdown in the economy at the end of 2020. Even if the fall in eurozone GDP is less severe than economists expect, it will still increase pressure on indebted governments, as well as on the European Central Bank, which should act ahead of the curve. And this is another reason why the European currency will remain under pressure.
As for the technical picture of the GBPUSD pair, a break of resistance in the area of the 36th figure will necessarily lead to a break in the downward trend formed at the beginning of this year and to a new larger wave of growth of the trading instrument to the highs of 1.3660 and the 37th figure. Talking about pressure, if the bears manage to cope with the activity of buyers in the area of 1.3601, it will be possible only after GBPUSD falls below 1.3530. In this case, we can expect a return to 1.3450 and an area of 1.3370.
A report by the Istat Bureau of Statistics indicated that Italian retail sales continued to decline at the fastest pace in seven months. This happened against the background of weak demand for non-food products due to the coronavirus pandemic. According to the data, retail sales fell immediately by 6.9% in November, after an increase of 0.5% in October 2020. This was the biggest drop since April 2020, when sales fell by 10.1% at once. The 1% increase in food sales was offset by a sharp 13.2% decline in non-food sales. On an annualized basis, retail sales decreased by 8.1% compared to the same period in 2019.
The report on small business optimism in the US was ignored by traders. According to the data, optimism was sharply reduced due to the growth of COVID-19 at the end of last year, as well as against the background of a record number of infections, which led to tougher work and the introduction of restrictions for many companies. According to the report, the sentiment index of the National Federation of Independent Business fell immediately by 5.5 points to 95.9 points, while economists had expected that this indicator would be 100.2 points. Renewed isolation measures continued to put pressure on business activity, which led to an increase in expectations of a reduction in sales. The owners' assessment of business conditions fell to the level of April 2016.
The NFIB noted that the American economy entered 2021 with the same problems that it faced in 2020.
As for the technical picture of the EURUSD pair, it remained unchanged compared to the morning forecast. Bulls will be able to level the situation, or at least stop the fall of the euro, only after they regain control of the resistance of 1.2180. Only a break in this range will provide a larger upward movement to the highs of 1.2225 and 1.2290. If sellers of risky assets are stronger and achieve a breakout of the minimum of 1.2130, then most likely the pressure on the trading instrument will only increase, which will open a direct road to the area of 1.2080 and 1.2040.