Marginal outperformance from the Pound this morning, since the money tracks the rebound in risk appetite. With this, the well-documented success in the UK's vaccine rollout program has played its part in underpinning the currency, particularly against the Euro. Nevertheless, apart from the fluctuations in danger sentiment, the most important focus for GBP will be to the Bank of England monetary policy record. Considering that the previous MPR ago in November, the short term outlook has shifted noticeably with the UK in its third lockdown. However, whilst growth projections are like to be cut onto the short horizon, the MPC have confessed that the diminishing impact lockdowns have had on economic activity.
Although, perhaps what's going to garner the most attention will be the BoE's review of adverse rates of interest. Subsequently, the central bank may well find that negative rates are operationally feasible, but this doesn't necessarily mean that the central bank will go down this root with Governor Baily himself noting that NIRP is a contentious matter. For the time being, adjusting asset purchases is the BoE's key reaction function with OIS markets pushing the likelihood of adverse rates until 2022. My view is that negative prices is extremely unlikely and will only go down this root as a last resort.
Having a look at volatility markets, GBP/USD implied vols are slightly firmer, reflecting the upcoming risk occasion. Although, vols aren't demonstrating a particularly increased risk for the Pound, although risk-reversals will also be showing a small premium for calls on the 1-week tenor, which is in accordance with the latest GBP trend.
EUR/GBP BIAS TO FADE RALLIES REMAINS
Last week, the ECB stepped up its rhetoric against the Euro, while vaccine disruptions has also reduced the appeal of the Euro. With this, with speculative positioning greatly long the Euro, liquidation risks bode well for further EUR/GBP downside. Nevertheless, with equity markets at risk of continued spells of de-leveraging, EUR/GBP will likely be vulnerable for short bounce-backs and thus allowing for the cross to be faded. Topside resistance located at 0.8860 and 0.8900-15.
