By Samuel Indyk
Investing.com - Bank of England officials were key to driving price action in GBP this week as conflicting comments saw the currency weaken early in the week before touching multi year highs on Thursday. On Monday, Silvana Tenreyro, one of the Bank of England’s nine members on the Monetary Policy Committee, said negative interest rates should boost growth and inflation. On the experience of negative rates in other countries, Tenreyro added, “there was no clear evidence that negative rates have reduced bank profitability overall”.
Nevertheless, her views on the benefits of negative interest rates are not shared by everyone on the Committee, including Governor Andrew Bailey. In reference to negative interest rates, Bailey said, “there are a lot of issues with it,” arguing that they will impact the profitability of banks which could reduce their willingness to lend to individuals and firms.
Following Bailey’s comments, GBP/USD rose to multi-year highs although continued to find resistance ahead of the 1.3710 level before retreating on Friday. GBP has also strengthened against the EUR, with EUR/GBP dropping to its lowest level since November.
The stronger GBP has also helped weigh on blue-chip stocks, as the FTSE 100 is set for its worst weekly performance since October. Further weighing on sentiment has been the increase in COVID cases in the UK and the additional lockdown measures that have dampened activity. GDP for November was released on Friday, showing a decline in output of 2.6% and although an improvement is expected in December, the stronger lockdown measures announced for England in January will likely inhibit growth in early 2021.
LOOKING FORWARD
In the coming week, investors will be looking out for clarity from the Bank of England on whether negative interest rates remain a viable option, should they wish to provide more easing to the economy. Andy Haldane, the Chief Economist at the central bank, is scheduled to speak on Tuesday, while Governor Andrew Bailey speaks at a virtual forum on Wednesday.
On the data calendar, markets will be focusing on UK inflation data on Wednesday but arguably more important could be December’s retail sales figures on Friday. This week saw supermarket Tesco PLC (LON:TSCO) report record weekly Christmas sales, following similar numbers from J Sainsbury PLC (LON:SBRY) the week before. However, that is not to say the UK retail market is thriving with many high street retailers suffering from continuing lockdowns. Retailers reporting earnings in the coming week include WH Smith PLC (LON:SMWH) and luxury brand Burberry Group PLC (LON:BRBY).
Elsewhere on the corporate front, miners will be in focus as BHP Group PLC (LON:BHPB), Antofagasta PLC (LON:ANTO) and Rio Tinto PLC (LON:RIO) all release production reports. Miners in the UK had come under pressure at the end of the week after China announced further COVID lockdowns affecting approximately 22 million people, a large enough number to have a material impact on industry. However, the retreat in share prices comes after a strong run from the beginning of the year, when miners had rallied on prospects of an improving economy and weaker dollar lifting metals prices.