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Pound Australian Dollar (GBP/AUD) Exchange Rate Buoyed as BoE Cast Doubts on Negative Interest Rates

January 12, 2021 - Written by John Cameron

GBP/AUD Exchange Rate Firms as amidst Falling Odds of Negative Interest Rates

The Pound (GBP) is ticking higher against the Australian Dolar (AUD) and the majority of its other peers this morning following comments from Bank of England (BoE) Governor Andrew Bailey regarding negative interest rates.

There has been speculation in recent months that the BoE could implement unconventional monetary policy as it seeks to support the UK’s economic recovery from the pandemic. With the UK going back into lockdown expectations for negative rates were back on the rise.

However, Bailey sought to pour cold water on such speculation this morning as he suggested there are ‘lots of issues’ with cutting interest rates below zero, comments which helped to bolster GBP exchange rates.

In an online speech to the Scottish Chambers of Commerce, Bailey said:

‘In simple economics and maths terms, there is nothing to stop it at all. However, there are a lot of issues with it. No country has used negative rates in 'retail' end of the financial market.’

Bailey suggested that negative interest rates would also create complications for the banking sector, and undermine their potential returns, but that it was working with banks to see if negative rates are practical.

However, at the same time, Bailey also warned that the UK economy is currently in a ‘very difficult’ place and that the new lockdown measures will impact the country’s recovery, something which may have capped Sterling’s gains this morning.

Australian Dollar (AUD) Exchange Rates Supported by USD Selling

At the same time, the Australian Dollar (AUD) is holding its own against the Pound (GBP) this morning, as the risk-sensitive ‘Aussie’ is buoyed by improving risk sentiment.

This appears partly attributed to a pullback in the US Dollar (USD), which rocketed higher at the start of this week as skittish investors flocked to the safe-haven currency.

However, with equity markets making a recovery today amidst renewed US stimulus optimism, the USD bulls have gone back into hiding, paving the way for the ‘Aussie’ to recoup some ground.

GBP/AUD Exchange Rate Forecast: Threat of More Coronavirus Restrictions Remains a Risk to Sterling

Looking ahead, the Pound to Australian Dollar (GBP/AUD) exchange rate remains vulnerable to potential losses in the days to come, amidst speculation the UK could face stricter lockdown restrictions.

With health experts stressing that more needs to be done as the country faces its ‘worst weeks’, GBP investors are bracing for the government to impose tougher measures to help bring down infections, something which is likely to put more pressure on the UK economy.

Meanwhile, the direction of AUD exchange rates is likely to remain dependent on market risk sentiment, with the ‘Aussie’ potentially pushing higher as expectations for a massive US stimulus package grows ahead of Biden’s inauguration next week.
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