GBP traders have seen plenty of volatility this week with GBP sinking lower over the first half of the week. The sell-off comes despite the governor of the Bank of England Andrew Bailey making an apparent about turn on negative rates.

There has been growing speculation over recent months that the BOE was moving closer to employing negative rates as seen in the Eurozone by the ECB and in Japan by the BOJ. Much of this speculation was driven by the BOE itself confirming that it had been having ongoing discussion about the practicalities and implications of using negative rates in the UK.

At the bank’s September meeting last week the minutes revealed that the bank had held detailed discussions around the impact of pushing rates below zero in the UK including discussions around how to protect bank profit margins and not end up in a counterproductive situation where lending stalled.

With this in mind, the market had stepped up its expectations that the BOE would soon employ negative rates. Pricing in the rates market reflected the view that the BOE would employ negative rates by the February 2021 MPC.

BOE Not Planning To Use Negative Rates

However, in a move which caught some off-guard today, the BOE governor ruled out any move into negative rates in the near future. Speaking during a British Chambers of Commerce webinar, the BOE governor said that the BOE had heled discussions around the use of negative rates with a view to understanding how they would work, but was not planning on using them.Bailey said: “Yes it’s in the tool bag, but that does not imply anything about the probability of us using negative interest rates at the moment.”

Bailey went on to say that the discussions referenced in the September meeting minutes were merely exploratory saying: “It would be a cardinal sin if we stated we had a tool in the box, which in practice we didn’t think we could operationally use . . . So it is no surprise we’re going to do this work. It’s going to take time because there’s quite a lot of technical complexity.”

Growing Concerns Over COVID

Bailey’s comments come amidst a backdrop of the UK PM announcing a fresh set of COVID restrictions this week. The BOE has reiterated recently the great deal of uncertainty and downside risks around the ongoing pandemic. Commenting on the current situation, Bailey reaffirmed his message of concern saying: “the hard yards are ahead of us…

“The latest news is we’re seeing a much faster and larger return of Covid and that’s obviously extremely difficult news for all of us in the country,” he said. “That does reinforce the downside risks in our forecast . . . and the BoE is going to do everything we could do in our remit and powers to support the people and businesses of this country. And we will do that.”

Technical Views

GBPUSD (Bearish below 1.3191)

From a technical viewpoint. GBPUSD has now broken firmly back below the rising channel from year to date lows and is fast approaching the 1.2649 level support. Should price slip below that level, the next main support is down at the 1.2238 level. To the topside, if price can recover above the channel low, the next resistance to note is the 1.3191 level.

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