On Tuesday, Sterling held steady at $1.30, as indications of progress in Brexit talks helped in cementing gains. Moreover, expectations for when interest rates would be cut down by the Bank of England to below zero were pushed back by investors. After managing to top $1.60 for the first time since the middle of September, the pound declined by 0.1% and reached $1.2966. In fact, it even ended up into negative territory before it made up ground, after it was reported that the European Union and Britain were moving very close to making a deal.
According to European Union diplomats, Brussels is readying up to negotiate with Britain as late as mid of November, rather than cutting off talks at the beginning of the next month. This would be helpful in avoiding a ‘no deal’ scenario, which could be quite damaging, when the standstill transition of Britain with the bloc comes to an end on December 31st. The sterling had last against the single currency by 0.1% to reach 90.91 pence. In recent days, there has been growing cautious optimism that Brussels and London would make a deal. Now, most analysts are expecting the two sides to come to an agreement before the end of the transition period.
Some analysts said that the talks seem to be picking up and they are getting quite close to finalizing a deal. From the perspective of the financial markets, it could be disastrous if a deal is not made. But, for now, the chances of this happening are 50:50. Earlier, the Sterling had reached its highest price since September 18th, as it reached $1.3007. This movement came when the bets over the interest rate in Britain turning negative were pushed back by the money markets. Now, investors are expecting the interest rates to fall below zero in May of next year.
Borrowing costs were reduced by the Bank of England to a record low of 0.1% back in March due to COVID-19. Now, it is considering whether it would be technically feasible to reduce the main interest rate and take it below zero. This is something that has already been done in the Euro Zone and in Japan. Jonathan Haskel, the rate-setter for the Bank of England, said on Monday that cutting interest rates below zero had some possible benefits, but there were also some downsides and risks to the economy that had to be taken into account.
According to experts and analysts, the Bank of England is still keeping the option open for cutting down interest rates because there is a possibility that negative rates may be helpful during the recovery process. Obviously, the pound will lose some of its strength if the interest rates go negative. This is expected in the short-term, but nothing could be said about it in the long term. For now, the pound is constantly fluctuating due to news about Brexit negotiations. There haven’t been any certain reports about a deal being agreed on, but the outlook is optimistic.