Intraday Market Thoughts

GBP Hit as BoE Re-ponders Negative Rates

by Adam Button
May 20, 2020 22:56

The pound reversed an early gain on Wednesday after the BOE said it would ponder negative rates. GBP lagged on the day while the kiwi led for the second day. The day ahead features several key US sentiment surveys and weekly initial jobless claims.The pound gave back gains after BoE governor Bailey said negative rates were under "active review", making him the 2nd official to open the possibility on the subject, less than one week after he struck down the idea.  Cable had traded as high as 1.2285 and pulled back 55 pips in the aftermath. EUR/GBP rose. After 6 weeks of false breaks and hesitancy, the EURGBP Premium long finally broke out intermediate resistance --currently 150-pips in the green. The Premium video below focuses on metals and indices. 

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GBP Hit as BoE Re-ponders Negative Rates - Video Snapshot May 20 2020 (Chart 1)

GBP Hit as BoE Re-ponders Negative Rates - Tweet Boe Negative Rates (Chart 2)

Bailey was clear that they're simply exploring the issue, but by repeatedly floating the idea, it begins to send that message that something is coming and they risk painting themselves in a corner or whipsawing the market.

Moreover, the suspicion is that openly talking about it is a real hint. Delving into the possibility and logistics of it is something a central bank should do in private before putting it out there.

The flipside of that messaging was demonstrated by the Fed and BOC Wednesday. The FOMC undoubtedly has been discussing the idea but there was no mention of it in the April 29 minutes, except to highlight that a survey of dealers showed they're not expected. The BOC's Lane offered a 'never say never' line but that 0.25% was the lower bound.

Other market-moving news was a Senate bill that will make it tougher for Chinese companies to list, or stay listed on US exchanges. That was coupled with more aggressive anti-China talk from Trump on twitter. It was a reminder that US-China relations are crumbling.

In any case, the fundamentals of the market remain extremely difficult to navigate and the technicals are improving. AUD/USD rose above its recent range to a two-month high, oil rose for a fifth day, stocks rose. Looking ahead, EUR/USD is threatening the key 1.1020 top and USD/CAD is threatening a break of the post-pandemic low.

In terms of news, the day ahead is expected to feature another 2.4m US jobless claims but despite the breaktaking losses so far, the market has paid no attention to this release. On the flipside, global PMIs have been stronger than expected this week and next up are the US services and manufacturing surveys from Markit. A beat would put the market to a different kind of test. If the market cheers better news, it could add fuel to the fire for risk assets.


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