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Market Update

• Posted by currencies in Bank of England, Brexit, coronavirus, Sterling, UK, Uncategorised
• January 6, 2021
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Sterling edged higher for a second consecutive session as the U.S. dollar weakened after Democrats took the lead in runoff votes that will determine control of the U.S. Senate.

Market watchers believe a Democrat-controlled Senate would help economic growth globally and thus riskier assets but drag down bonds and the dollar as the U.S. budget and trade deficits would be likely to grow.

With the market’s medium to long-term view still pointing towards the `back to normal’ trade, downside on the pound should be limited, especially as positioning is very neutral.

For now, though, markets remain cautious on the pound’s outlook.

The expected damage to the economy from a new national lockdown announced this week raised expectations the Bank of England will announce more policy easing.

Money markets now expect the central bank to take benchmark interest rates into negative territory as early as May, compared with an August estimate just after the Brexit deal was struck.

And while bullish pound bets have registered a fourth consecutive week of gains, according to weekly positioning data the size of the gains in the latest week is far smaller than in previous weeks.

The U.S. dollar slipped on Wednesday as Democrats took the lead in runoff votes that will determine control of the U.S. Senate and possibly pave the way for a big spending administration under President-elect Joe Biden.

A Democratic-led government is expected to add more stimulus to help mitigate the virus crisis and… that means that there is going to be a weaker dollar.