Forex Market: GBP/USD off two-week highs as negative interest rates remain a possibility

GBP/USD retreated from two-week highs overnight and remained in the red during late European trade on Wednesday, as the US Dollar strengthened and market players refocused on probability of negative interest rates in the United Kingdom.

In a statement during a CBI webinar on Tuesday, Bank of England Chief Economist Andy Haldane played down the prospect of an imminent emergency rate cut to sub-zero levels, while noting that “reviewing and doing are different things.”

Haldane also said that recent UK macro data was “a shade better” compared to what BoE had forecast earlier in May, but there still was a possibility of a slower economic recovery, with businesses and consumers remaining wary.

Bank of England warned that UK’s GDP might contract at a steep rate in the second quarter and lead to a 14% overall drop for the year. The bank also forecast a swift recovery in 2021, while Haldane said it would probably be a “fairly lopsided V-shaped” recovery.

Still, however, some analysts see negative rate speculation as having a persistent influence on markets.

“The door has been opened to the prospect of negative rates given the BoE clearly before has explicitly ruled out negative rates,” Derek Halpenny, head of research at MUFG, stated. “We do not see Haldane’s comments yesterday as a signal of a reversal of the negative rate speculation.”

As of 12:27 GMT on Wednesday GBP/USD was losing 0.50% to trade at 1.2275, after earlier touching an intraday low of 1.2258.

In terms of economic calendar, at 16:30 GMT today Federal Reserve President for St. Louis James Bullard is expected to speak on “Views on the Pandemic from Onset to Reopening the Economy” and to participate in moderated question-and-answer session via webex to the C.D. Howe Institute.

Additionally, at 18:00 GMT the Federal Reserve Bank is to release its ”Beige Book” report. It is published eight times during the year. Each of the banks in the 12 Federal Reserve Districts gathers data in regard to current economic situation in the country on the basis of interviews with key business contacts, economists, market experts and other sources.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 20.0 basis points (0.200%) as of 10:15 GMT on Wednesday. It has remained close to Tuesday’s one-week low.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2295
R1 – 1.2405
R2 – 1.2473
R3 – 1.2583
R4 – 1.2694

S1 – 1.2226
S2 – 1.2116
S3 – 1.2048
S4 – 1.1979