BOE’s Baily downplays negative rates amid coronavirus: GBP/USD, EUR/GBP

Due to lockdowns, the risk is that economic activity in the UK may slow dramatically.

FOREX 2

There is no doubt that the UK is going through a tough time with the coronavirus pandemic.  Not only is the country dealing with lockdowns that will last until at least mid-February, but there are strong worries over how this will play out in the economy as well.  The Bank of England’s Baily said that the UK economy is facing its “darkest hour”, echoing sentiments from finance minister Sunak.  Worries of a double dip recession are widespread.  However, Baily downplayed suggestions that lowering interest rates into negative territory was the way to solve the problem because it could reduce loans made by banks, as well as, bank profitability.  In a relatively quiet market today, GBP traders showed their approval of Baily’s comments by buying the Pound.  Could the move higher continue?

GBP/USD

GBP/USD has been in a channel uptrend since the mid-September 2020.  Hope of a Brexit deal moved to the forefront as coronavirus fears faded.  As the year ended, a Brexit deal was finalized AND the UK was sent back into lockdown.   GBP/USD pulled back from the top of the channel and weekly horizontal resistance near 1.3700 to a low yesterday of 1.3450.  (This move was also helped by a stronger US Dollar to start the year.) However, the pair is on the move again today, up over 1%, and is eyeing the 1.3700 level once again!

Source:  Tradingview, City Index

The shorter-term 60-minute chart shows that GBP/USD formed a pennant near the downward sloping trendline, and broke higher above both.  The target for the pennant is 1.3650.  There is short-term resistance above near 1.3670 before reaching the January 4th highs of 1.3703.  Support below is at he the trendline breakout near 1.3595 ad  then previous support near 1.3545.  1.3503 is today’s lows, which provides the next support level.

Source:  Tradingview, City Index

EUR/GBP

EUR/GBP has been in a symmetrical triangle since the pandemic volatility in mid-March 2020.  The pair has been moving lower for the past 4 days, and today,  the pair broke below the 200 Day moving average and has hit support at the upward sloping bottom trendline of the symmetrical triangle near 0.8920.  If price breaks below the trendline, there is horizontal support below at 0.8860. 

Source:  Tradingview, City Index

On a 60-minute timeframe, EUR/GBP traded below the prior lows on the first trading day of 2021 at 0.8945.  If price continues lower,  the first support isn’t until the previously mentioned 0.8860.  This level coincides with the 161.8% Fibonacci extension on the 60 minute timeframe from the January 1st lows to the January 6th highs.  The RSI has moved back into neutral territory, indicating that EUR/GBP may have another run at the downside.

Source:  Tradingview, City Index

The coronavirus is wreaking havoc across the UK.  Due to lockdowns, the risk is that economic activity may slow dramatically.  More stimulus may be needed.  However, BOE Governor Baily doesn’t think the time is right for negative rates!

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