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Strong retail data support sterling, outlook remains bleak

Sterling got support on Friday from data showing British shoppers kept increasing spending last month, taking sales further above their pre-COVID-19 levels, although the outlook for the pound remains bleak. The currency was flat versus the euro at 0.9131 at 1001 GMT , and up 0.1% against the dollar at $1.2984, after falling to $1.2866 on Thursday when the Bank of England said it was examining how it might cut interest rates below zero.

Reuters | Updated: 18-09-2020 15:55 IST | Created: 18-09-2020 15:55 IST
Strong retail data support sterling, outlook remains bleak

Sterling got support on Friday from data showing British shoppers kept increasing spending last month, taking sales further above their pre-COVID-19 levels, although the outlook for the pound remains bleak.

The currency was flat versus the euro at 0.9131 at 1001 GMT , and up 0.1% against the dollar at $1.2984, after falling to $1.2866 on Thursday when the Bank of England said it was examining how it might cut interest rates below zero. British retail sales now stand 4.0% higher than before the crisis. The sector has enjoyed a faster rebound than the rest of the economy, helped by strong online demand.

But the prospect of a chaotic end to the Brexit transition period in December if Britain fails to agree a trade deal with the European Union continues to overhang sterling. "The increased probability of no-deal Brexit makes negative rates even more likely, in our view," said ING analysts.

The BoE kept its main stimulus programmes on hold this week, as expected, and said that Britain's economy had performed better than expected. But highlighting risks relating to rising COVID-19 cases, the unwinding of jobs protection schemes, and Brexit, the BoE said it was ready to take further action.

Kit Juckes, head of FX strategy at Societe Generale, said that with the pound already very close to record lows touched in 1976, "negative rates can take sterling to a new all-time low." "Cutting rates to below zero in the wake of a decision to leave the EU without a trade deal, would indeed seem reckless," Juckes added.

ING analysts wrote in a note to clients that they expect EUR/GBP to test 0.9300 again this month. "We continue to see more downside to GBP as not enough risk premia is priced into the currency."


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