FX.co ★ Outlook for GBP/USD and EUR/USD. Bad news for pound sterling. BoE warns about negative rates

The speech provided by Bank of England Governor Andrew Bailey at The British Chambers of Commerce webinar had an extremely negative influence on the pound sterling. Besides, there are other facts that go on weighing on the trading instrument. However, bears managed to benefit from the situation and brought the British pound back to the level of 1.2775 thus halting a strong downtrend.

From the technical point of view, the pound/dollar pair showed no changes compared to the morning forecast. Everything depends on the fact whether bears have enough strength to make the pair break the support level of 1.2775. However, the first break of the level showed that traders avoid sell deals. If buyers' activity remains sluggish, the pound sterling is likely to slump to the lows of 1.2675 and 1.2585. However, if the trading instrument returns to the resistance level of 1.2870, it may jump to the high of 1.3000.

So, why did Andrew Bailey's speech push the pair to the support level of 1.2775? In fact, he almost openly said that the central bank was planning to cut interest rates. It means that the regulator will switch to negative rates. Of course, the information is not new. The main shock was caused by the news that the regulator may take such a decision as early as February instead of next summer. Buyers of the pound sterling were really surprised. This reaction led to the currency's depreciation.

However, there are other facts that weigh on the British pound. Of course, the Brexit issue puts pressure on the currency. However, the jump in the number of coronavirus cases has a more significant influence. There are rumors that the UK's government may resort to emergency measures, namely, a two-week quarantine around the country. If these predictions come true, the pound sterling may nosedive against the US dollar as it will lose attractiveness compared to other risky assets.

Moreover, the BoE's governor also emphasized that the regulator would not raise the key interest rate until inflation reached the targeted level of 2.0%. According to Andrew Bailey, soon after the UK economic recovery slows down, the country will face difficult times that will require serious decisions. Notably, the population support program ends in October. After that, economists will see the real picture of unemployment in the country. However, there are rumors that this program could be extended. Mr. Bailey also reiterated that the Bank of England will do everything possible to support the economy, but it will be impossible without fiscal measures.

At the same, the central bank is likely to extend its quantitative easing program in November in order to stimulate economic growth. However, in February 2021, it will introduce negative interest rates.

EUR/USD

Given the absence of important fundamental statistics today, the pressure on the euro was also limited in the first half of the day. After an unsuccessful attempt to break below the monthly lows, the pair returned back to the opening level.

From a technical point of view, nothing has changed. Bears will continue to focus on breaking through and fixing below the low of 1.1735. If the pair easily reaches the level, it may drop to new support levels of 1.1695 and 1.1645. If the price returns to 1.1770, the buyers will become more active. However, if the quote goes above 1.1770, it may jump to 1.1820.

A rather interesting report was published today by the Ifo Institute. Thus, economists upwardly revised the situation in the German economy. It is expected that further growth will be no less active than in the summer period. The Institute's economists forecast that the eurozone's main economy will contract by 5.2% in 2020, rather than by 6.7% as expected in the summer, as the GDP drop in the second quarter was less than expected. A smaller reduction in activity is also expected this year. According to forecasts, the economy will grow by 5.1% in 2021, while in 2022 it will advance by only 1.7%.

However, the worsening epidemiological situation will shape the control measures and social distancing that could be imposed later. Moreover, if the EU and the UK fail to sign an agreement, a new trade war may break out.

As far as the labor market is concerned, the number of unemployed people in Germany in 2020 is expected to rise to 2.7 million compared to 2.3 million last year. In 2021, the indicator could fall to 2.6 million.