The FTSE 100 erased early gains to trade near the flat line at 5,800 on Tuesday, after posting its biggest one-day fall in more than three months in the previous session. Bank of England Governor Bailey warned that the recent rise in COVID-19 cases “reinforced the downside risks” facing the UK economy and that the country’s unemployment was higher than the official data. At the same time, Bailey tried to cool expectations about negative interest rates, after last week’s meeting minutes signaled there was a possibility of that happening in the coming months. Investors also digested details about new lockdown measures aiming to curb the second wave of coronavirus infections, with Prime Minister Boris Johnson telling people to work from home and announcing new restrictions on pubs, bars, and restaurants.
The GBP/USD pair prolonged its recent rejection slide from the key 1.3000 psychological mark and dropped to near two-month lows during the early European session on Tuesday. The downfall was sponsored by fresh coronavirus jitters and rising odds of fresh lockdown measures to curb the second round of the outbreak. This, in turn, continued weighing on investors’ sentiment and benefitted the US dollar’s relative safe-haven status. The British pound lost some additional ground after the UK Cabinet Minister Michael Gove said that new restrictions will be imposed in the UK and Prime Minister Boris Johnson will spell out further details later this Tuesday.
The pair dropped to the lowest level since July 24th, albeit managed to rebound swiftly in reaction to the BoE Governor Andrew Bailey’s comments, saying that the UK economic recovery has been quite rapid and substantial. Speaking at a webinar hosted by the British Chamber of Commerce, Bailey further clarified that last week’s BoE statement did not imply that the central bank would use negative rates. This turned out to be the only factor extended some support to the British pound, instead prompted some intraday short-covering move from the very important 200-day SMA and led to the pair’s strong recovery of around 120 pips.
Meanwhile, the USD struggled to preserve its gains amid expectations that the Fed Chair Jerome Powell will reiterate to keep interest rates lower for longer during his congressional testimony later this Tuesday. Hence, the goodish recovery move could further be attributed to some repositioning trade ahead of the key event risk. In the meantime, the US economic docket – featuring the releases of Existing Home Sales and Richmond Manufacturing Index – will be looked upon for some trading impetus.