The pound rallied against the dollar and euro on Tuesday as the governor of the Bank of England outlined the stark challenges facing the U.K. economy.
Sterling rose 0.65% against the dollar
touching the $1.36 benchmark, and lifted 0.55% against the euro
as London markets fell. Concerns continue about the dire health and economic situation caused by COVID-19 in the U.K.
“Banks and energy stocks were the flavor of the day on Tuesday, but sadly not enough to stop the FTSE 100 from slipping,” said Russ Mould, an analyst at AJ Bell.
Bank of England governor Andrew Bailey, in an online speech to the Scottish Chambers of Commerce, said that the U.K. economy is “in a very difficult period at the moment, and there is no question that it is going to delay, probably, the trajectory.”
The governor also played down the idea of cutting interest rates into negative territory to boost growth, saying that “there are a lot of issues” with negative rates.
Bailey’s comments on interest rates come a day after Silvana Tenreyro, a voting Bank of England official, dismissed arguments against negative rates and said they could provide significant stimulus.
Bailey also said that he believes that jobs data miss the true rate of unemployment, which could be closer to 6.5% than the latest official 4.9% figure.
The U.K. looks set to enter a double-dip recession, following the biggest slump on record between April and June 2020, with estimates that gross domestic product fell in the final quarter of 2020 and is set to fall in the first quarter of 2021.
“After an impressive start to the year, equity markets are finding it harder to push ahead this week amid growing expectations for the Federal Reserve to start easing back on its monetary support measures toward the end of the year,” Mould said.
“We’re in a period where investors are trying to get their head round what could happen next.”
Economic pessimism from the central banker comes as England continues to battle COVID-19, with the country’s chief medical officer warning on Monday that the most dangerous time in the pandemic is immediately ahead.
The U.K. reported 46,169 new coronavirus cases on Monday and 529 deaths. There were more than 400,000 new cases in the week before Jan. 11, and total deaths from the disease topped 80,000 over the weekend.
A rebound in oil prices came on the back of expectations that U.S. crude stockpiles have fallen for the fifth week in a row, ahead of a report from the American Petroleum Institute later in the day.
A drawdown in U.S. inventories would come a week after Saudi Arabia’s surprise announcement that it will cut production by 1 million barrels a day in February and March.
Brent crude was 1.4% higher on Tuesday, above $56 a barrel, while West Texas Intermediate rose 1.2% as oil hovers near an 11-month high.
Pharmaceutical and consumer-goods companies led the Tuesday tumble, with shares in AstraZeneca
and Reckitt Benckiser
leading the list of the worst performers on London’s top index.
Outside of the FTSE 100, shares in The Hut Group
climbed more than 1.5% after the online retailer increased its sales guidance for the third time since the company went public in September 2020.