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Sterling recovers on hopes of Brexit deal

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Bank of England Governor Andrew Bailey noted that while the bank is realistic about the potential challenges negative interest rates could pose to the UK financial system, they are not ruling out their introduction as an attempt to help the economy’s performance.

BOELast week, sterling recovered from the previous week’s losses, gaining 1.46 percent to close Friday’s session at 1.2931.

Talks between the UK and the European Union continued last week, hinting at the possibility of a Brexit trade deal. Despite the final round of official talks ending without any significant progress, European Commission President Ursula von der Leyen held a phone call with British Prime Minister Boris Johnson in which she agreed on the importance of finding an agreement and on both sides believing that reaching an agreement is possible. .

The pound rallied ahead of Friday’s session, closing the session and the week in positive territory, recovering from a 1.32 percent loss the previous week.

Last week the markets got some important information about the state of the UK economy. On Tuesday, the Bank of England reported that net lending to individuals reached £3.4bn in August, down from £3.9bn in July (month-on-month). Consumer credit was £0.3bn in August, after coming in at £1.052bn the previous month and below analysts’ expectations of £1.45bn.

In monthly terms, the M4 money supply decreased by 0.4 percent in August, after a 0.8 percent increase in July and well below the forecast of 1.3 percent among polled analysts. In year-on-year terms, the money supply increased by 12.1 percent in August, after being 13.4 percent in July. The number of mortgage approvals rose by 66,300 in July to 84,700 in August, beating analysts’ expectations for an expansion of 71,000. The purchase price index was -1.6 percent in August (year-on-year), unchanged from the previous month .

Bank of England Governor Andrew Bailey noted that while the bank is realistic about the potential challenges negative interest rates could pose to the UK financial system, they are not ruling out their introduction as an attempt to help the economy’s performance.

That does not mean we would rule out using negative interest rates for a while,” he said, after pointing out that the large share of retail deposits in the UK banking system could undermine the effectiveness of imposing negative cash rates. It means to say that we are realistic enough, I think, to know that the transmission mechanism will be affected,” he added.

On Wednesday, the Office for National Statistics reported that overall business investment reached -26.1 percent (year-on-year) in the second quarter, after falling 31.3 percent in the previous quarter. In quarterly terms, it fell by -26.5 percent after a 31.4 percent decline in the previous quarter.

National home prices rose 0.9 percent (month-over-month) in September, after rising 2 percent in August and beating analysts’ expectations for a 0.5 percent rise. On a year-over-year basis, home prices rose 5 percent after rising 3.7 percent in the previous month and beating the 4.5 percent analysts expected.

The current account for the second quarter came in at £2.8bn, below analysts’ expectations of -0.4bn and after coming in at -£20.814bn in the previous quarter. Gross domestic product contracted 19.8 percent in the second quarter (quarter-on-quarter), better than expected, and improved from a 20.4 percent decline in the previous quarter. Gross domestic product fell 21.5 percent year-on-year after a 21.7 percent drop in the previous quarter.

On Thursday, Markit Economics, along with the Chartered Institute of Purchasing & Supply, reported that the manufacturing sector expanded in September, reporting that the manufacturing PMI came in at 54.1, albeit slightly worse than August’s 54.3.

Bank of EnglandChief Economist Andy Haldane stressed that the economy had recovered faster than expected and said the conditions for introducing negative rates were not yet met.

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