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Strong retail data support sterling, but outlook remains bleak

Sterling got support today from data showing British shoppers kept increasing spending last month, taking sales further above their pre-Covid-19 levels, although the outlook for the pound remains bleak. 

The currency was up against the euro at 0.916 today but down 0.2% against the dollar at $1.295.

It fell to $1.2866 yesterday when the Bank of England said it was examining how it might cut interest rates below zero.  

UK retail sales now stand 4.0% higher than before the crisis. The sector has enjoyed a faster rebound than the rest of the economy, helped by strong online demand. 

But the prospect of a chaotic end to the Brexit transition period in December if Britain fails to agree a trade deal with the European Union continues to overhang sterling. 

“The increased probability of no-deal Brexit makes negative rates even more likely, in our view,” said ING analysts. 

The Bank of England kept its main stimulus programmes on hold this week, as expected, and said that Britain’s economy had performed better than expected. 

But highlighting risks relating to rising Covid-19 cases, the unwinding of jobs protection schemes, and Brexit, the Bank of England said it was ready to take further action. 

Analysts said that with the pound already very close to record lows touched in 1976, negative rates can take sterling to a new all-time low. 

ING analysts wrote in a note to clients that they expect EUR/GBP to test 0.9300 again this month.

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