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GBP/USD keeps range around 1.3050 on Tuesday after the pound staged a modest relief rally yesterday after the new COVID-19 restrictions announced by Prime Minister Boris Johnson. At the same time, the looming risk of negative rates being imposed in the UK resurfaced again, economists at MUFG Bank apprise. 

Key quotes

“The UK government unveiled a new three-tier COVID-19 alert system. Under the new system, Liverpool became the first region in England to have even tougher lockdown restrictions imposed as it is now classified as being on ‘very high alert’ for COVID-19. It had been speculated that other northern regions including Manchester and Newcastle would have similar tougher restrictions imposed. Instead, those regions that are already subject to some local restrictions have been placed on ‘high alert’.”

“While there was some initial relief that the new measures are not as restrictive for economic activity as feared, it remains to be seen whether they will have much effect at dampening the spread of COVID-19 which has surged in recent weeks. There is a clear risk that more restrictions will be imposed in the coming weeks/month.” 

“It was reported that the BoE has asked commercial banks how ready they are for negative rates. The BoE wrote to banks it regulates to ‘assess the appropriateness of a negative official bank rate alongside all of its other tools’. However, the report had only a limited impact on the UK rates market and the pound. Deputy Governor and chief executive of the Prudential Regulation Authority Sam Woods told banks that the letter was ‘not indicative that the MPC will employ a zero or negative rate policy rate’. It was followed by comments from BoE Governor Bailey later in the day stating that the BoE is not yet ready to implement negative rates.”

“Recent comments from BoE officials have signalled that if negative rates are to be introduced, it is more likely to be from later next year. It has helped dampen downside risks for the pound in the near-term.”