Pound Sterling Recovers on Brexit Deal Hopes

Bank of England Governor Andrew Bailey commented that despite the bank being realistic in regards to the possible challenges that negative interest rates could pose for the British financial system, they’re not ruling out imposing them as an attempt to aid the performance of the economy.

Last week, the pound sterling recovered from the previous week’s losses, gaining 1.46 percent and closing Friday’s session at the 1.2931 level.

Conversations between the UK and the European Union continued last week, hinting the possibility of reaching a Brexit trade deal. Despite the final round of official negotiations ended without any important advance, the EU Commission President Ursula von der Leyen held a call with the UK prime minister Boris Johnson, agreeing on the importance of finding an agreement and convincing both sides that reaching an accord is possible.

The pound rose ahead of the meeting on Friday, closing the session and the week in the positive territory, and recovering from the previous week’s 1.32 percent loss.

Last week the markets got a few important pieces of information about the state of the British economy. On Tuesday, the  Bank of England reported that net lending to individuals stood at 3.4 billion pounds in August, dropping from July 3.9 billion pounds (month-to-month). Consumer credit stood at 0.3 billion pounds in August, after being at 1.052 billion pounds in the previous month and below the analysts’ expectations, who foresaw it to be 1.45 billion pounds.

In monthly terms, M4 money supply dropped by 0.4 percent in August, after advancing by 0.8 percent in July and considerably below the surveyed analysts forecast, which was at 1.3 percent. In yearly terms, the money supply expanded by 12.1 percent in August, after being at 13.4 percent in July. Mortgage approvals rose, going  66,300 in July to 84,700 in August, over the analysts’ expectations, who foresaw a 71,000 expansion. The shop price index was at -1.6 percent in August (year-to-year), remaining unchanged from the previous month’s figure.

Bank of England Governor Andrew Bailey commented that despite the bank being realistic in regards to the possible challenges that negative interest rates could pose for the British financial system, they’re not ruling out imposing them as an attempt to aid the performance of the economy.

“That does not mean to say that we rule out using negative interest rates for a moment,” he said after pointing out that the big share of retail deposits in the UK’s banking system could undermine the effectiveness of imposing negative cash rates, “It means to say we are realistic enough, I think, to know that the transmission mechanism would be affected,” he added.

On Wednesday, the Office for National Statistics reported that total business investment stood at -26.1 percent in the second quarter (year-to-year) after contracting by 31.3 percent in the previous quarter. In quarterly terms, it went down by -26.5 percent after dropping by 31.4 percent in the previous quarter.

Nationwide housing prices increased by 0.9 percent (month-to-month) in September, after being at 2 percent in August and over the analysts’ expectations, who foresaw it to be at 0.5 percent. In yearly terms, housing prices climbed by 5 percent, after advancing 3.7 percent in the previous month and over the 4.5 percent expected by the analysts.

The current account for the second quarter came at 2.8 billion pounds, below the analysts’ expectations who foresaw it to be at -0.4 billion, and after being at -20.814 billion pounds in the previous quarter. The Gross Domestic Product contracted by 19.8 percent in the second quarter (quarter-to-quarter), better than expected, and improving from the previous quarter’s 20.4 percent drop. In yearly terms, the Gross Domestic Product went down by 21.5 percent, after dropping by 21.7 percent in the previous quarter.

On Thursday, Markit Economics together with the Chartered Institute of Purchasing & Supply reported that the manufacturing sector expanded in September, announcing that the manufacturing PMI stood at 54.1, though slightly worse than August’s 54.3.

The Bank of England’s chief economist Andy Haldane highlighted that the economy has recovered faster than expected, saying that conditions for imposing negative rates have not been satisfied yet.