GBP/USD suffers first weekly decline on negative interest rates fears

Written by: Crispus Nyaga
January 8, 2021
  • The GBP/USD pair is heading for its first weekly decline in four weeks.
  • The recent lockdowns will have a negative impact on the UK economy.
  • Subsequently, some analysts believe that the BOE will pull rates negative.

The GBP/USD pair is heading for its first weekly decline in four weeks as forex investors react to the rising coronavirus cases in the UK and the subsequent lockdown. It is trading at 1.3600, which is slightly lower than this week’s high of 1.3705. 

GBP/USD 3-hour chart

Fears of negative interest rates

The UK is having a surge in the number of new coronavirus cases because of the new strain of the virus. Yesterday, the country confirmed more than 52,00 new cases, pushing the total number of infections to more than 2.89 million. Total deaths rose by more than 1,000 to more than 78,000. 

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Therefore, the GBP/USD has eased because investors are worried about the possibility of negative interest rates. Indeed, media reports suggested that the Bank of England (BOE) was still considering pushing them negative in the next few months. In a note, analysts at MUFG said:

“The hit to the UK economy from the third lockdown will increase pressure on the BoE to deliver additional monetary stimulus as soon as their next meeting in February. We now expect the BoE to move rates into negative territory in February by lowering the key policy rate from 0.10% to -0.15%.”

Indeed, recent economic numbers from the UK have not been pleasing. Earlier today, data from Halifax showed that the house price index rose by just 0.2% in December. That was a significant decline from the previous month’s increase of 1.0%.

Negative rates, if implemented, will have mixed results for the UK economy. On the positive side, they will lead to higher asset prices because they will incentivise people to buy more. On the negative side, negative rates will affect the vital financial sector. 

The GBP/USD pair also reacted to the nonfarm payroll numbers from the United States. The data showed that the economy lost more than 140,000 jobs in December; the worst performance since April. The unemployment rate remained steady at 6.7% while the average hourly earnings rose by 5.1%.

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GBP/USD technical outlook

GBP/USD technical chart

On the weekly chart, the GBP/USD has been on a strong upward trend in the past few months. Consequently, it is currently below the important 38.2% Fibonacci retracement level. Also, the 50-day and 200-day exponential moving averages are about to make a golden crossover. 

Therefore, in the longer term, the pair will possibly continue rising, with the next key target being at 1.1433. However, a drop below the 23.6% retracement level at 1.2815 will invalidate this trend.