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BoE’s Haldane says UK recovering ‘faster than anyone expected’

Britain is recovering faster than anyone had expected from the economic impact of COVID-19, but businesses need better incentives and access to finance to invest in technology, BoE’s chief economist Andy Haldane said.

“UK GDP had, by July, recovered around half of its Covid-related losses, rebounding further and faster than anyone expected,” Haldane said in an article for the Mail on Sunday newspaper written jointly with the former chairman of John Lewis Partnership, Charlie Mayfield.

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Britain’s central bank said in a policy statement on Thursday the economy was recovering faster than it had forecast in August, though prior to that several policymakers had struck a more cautious tone than Haldane.

Haldane said he was writing in his capacity as chairman of a government commission to boost economic productivity.

Reporting by David Milliken; Editing by Chris Reese

Source: UK Reuters

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UK economy grows 6.6 per cent in July as recovery continues

The UK economy grew 6.6 per cent in July as it bounced back from the coronavirus lockdown of the spring, setting the stage for rapid GDP growth in the third quarter, official figures showed.

The growth was slower than the 8.7 per cent expansion seen in June, however, and was from a low base after the historic collapse in output in the second quarter.

“While it has continued steadily on the path towards recovery, the UK economy still has to make up nearly half of the GDP lost since the start of the pandemic,” said Darren Morgan, director of economic statistics at the Office for National Statistics (ONS), which released the figures.

In July, the UK’s all-important services sector grew 6.1 per cent. It makes up around 80 per cent of the economy. The sector was boosted by the reopening of pubs and restaurants at the start of the month.

Production, which includes manufacturing, expanded by 5.2 per cent. But construction shone, growing a huge 17.6 per cent after expanding by 23.6 per cent in June.

Nonetheless, July output in the massive UK services sector remained 12.6 per cent lower than in February despite the quick GDP growth. And rising coronavirus cases could derail the recovery.

Chancellor Rishi Sunak said: “Today’s figures are welcome.” But he added: “I know that many people are rightly worried about the coming months or have already had their job or incomes affected.”

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“That’s why supporting jobs is our first priority.” He flagged the Eat Out to Help Out scheme, VAT cuts and the £1,000 retention bonus for jobs brought back from furlough.

UK economy 11.7 per cent smaller than in February

Some parts of the services sector were running at almost full capacity. Output in wholesale and retail trade rebounded to higher than its February level. Financial and insurance activities and real estate were only slightly off.

But other sub-sectors lagged far behind, highlighting the unequal effect of the coronavirus crisis.

Output in accommodation and food services grew strongly but was nonetheless only running at 40 per cent of its February level in July. Arts, entertainment and recreation was also well off.

Tej Parikh, chief economist at the Institute of Directors business group, said: “The economy continued its rebound in July, but the hard part is still to come.

“The recovery will start to hit speed bumps into the end of the year. Local lockdowns and new restrictions heap uncertainty on businesses, and demand remains limited in many areas.”

The ONS said the UK economy was 18.6 per cent bigger in July than it was at its April low.

Yet in July UK GDP remained 11.7 per cent below its level in February, before the full impact of the coronavirus pandemic.

GDP recovery ‘likely to stall’

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said growth was likely to be strong in August and September.

He said it would be “assisted by far greater than usual numbers of people staying in the UK during the summer holiday season” and “the full reopening of schools”.

But he said: “Thereafter, the recovery likely will stall if, as looks likely, new Covid-19 infections continue to rise.” Tombs said that would keep “people working from home and avoiding consuming services that require close human contact”.

Coronavirus cases have risen sharply in recent days. The number of daily new cases has consistently been just below 3,000 this week, whereas they were consistently half that the week before.

In response to the spike, the government has limited the number of people who can meet socially to six.

Yael Selfin, chief economist at auditing giant KPMG, said: “The risk of a second wave of infections in the autumn could derail the nascent recovery and put the economy into a lower gear.”

By Harry Robertson

Source: City AM

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Bank of England: UK economy ‘likely’ to need further stimulus

Bank of England interest rate-setter Michael Saunders said today that it was “quite likely” that more stimulus will be needed for Britain’s Covid-hit economy in a downbeat speech on the outlook.

“I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the two per cent target,” Saunders said.

Growth was likely to disappoint relative to the Bank’s forecasts published last month, Saunders said.

He said an ongoing recovery was the result of a “benign window” – the combination of huge government spending and the relaxation of lockdown measures.

“This window may now be closing,” Saunders said, adding that a downside scenario for the economy would be “very costly”.

Saunders said the withdrawal of the government’s furlough scheme at the end of October was likely to lead to a spike in unemployment.

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“Unemployment is likely to rise significantly in coming quarters as the furlough scheme winds down and workforce participation recovers,” he said.

“The scale of the projected rise in unemployment (about 3½ percentage points) is similar to that seen in 2008-11, but it occurs much faster. Indeed, it would be, by some distance, the sharpest rise in unemployment for at least 50 years.

“While there are uncertainties around that forecast, my view is that the picture of a sharp rise in unemployment is – sadly – highly plausible,” he added.

On Wednesday, the Bank’s deputy governor Dave Ramsden and another rate setter, Gertjan Vlieghe, also warned the economy could suffer more damage from the coronavirus crisis than spelt out by the central bank last month.

Many economists expect the Bank to announce a ramping-up of its bond-buying programme in November.

By James Booth

Source: City AM

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Bank of England: Downturn better than feared but UK faces longer recovery

The Bank of England has significantly improved its prediction for the path of the UK economy this year, but said the recovery will take longer than initially expected.

The Bank’s projection, released today, said the UK economy was likely to shrink by 9.5 per cent this year and then grow by nine per cent in 2021.

It is still more optimistic than many forecasts, but predicts a slower rebound that the Bank expected in May. Then, it said GDP would shrink by 14 per cent this year and grow by 15 per cent in 2021.

Threadneedle Street’s latest monetary policy report predicted UK GDP would not recover its pre-coronavirus size until the end of 2021. It had previously expected it to recover by “the second half of 2021”.

It came as the Bank left interest rates on hold at their record low level of 0.1 per cent. And it left its bond-buying target at £745bn, both in 9-0 votes among the monetary policy committee (MPC).

The MPC flagged that rates could stay lower for longer, however. It changed its guidance to say it “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the two per cent inflation target sustainably”.

The pound jumped in the wake of the decision. It was last up 0.4 per cent at $1.317.

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Bank of England: 2020 better than expected but 2021 worse

Bank of England governor Andrew Bailey told journalists: “We have had a strong recovery in the last few months.”

“The pace of recovery in the data that we’ve had since May puts the economy ahead of where we thought it would be in May.” This was largely due to the lockdown being eased earlier than expected, the Bank said.

It predicted that unemployment is likely to touch 7.5 per cent this year and then drop to six per cent in the fourth quarter of 2021.

That would put 2.5m people out of work but is an improvement on May’s rough estimate of eight per cent unemployment on average in 2020 and seven per cent in 2021. It means unemployment would stay lower than during the financial crisis.

But unemployment is set to stay higher for longer, at 4.5 per cent by the end of 2022 compared to May’s expectation of a fall to four per cent for the year on average.

The Bank warned that much of the economy was still suffering. “Household spending that involves high levels of interactions with others fell the furthest and has recovered only partially,” it said.

Bailey said the recent rebound in growth is not “necessarily a good guide to the immediate future”. He said elevated concerns about coronavirus are likely to constrain spending. And heightened business uncertainty would likely weigh on investment.

Some analysts said the Bank was being too optimistic about the UK economy. Yael Selfin, chief economist at KPMG, said that “the cloud of a second wave and further localised lockdowns” pose a threat to the Bank’s forecasts.

Negative interest rates in ‘toolbox’ for the first time

The Bank today said that negative interest rates have been added to the ‘toolbox’ of possible measures for the first time. But Bailey said: “We’re not planning to use them at the moment.”

Negative interest rates mean banks who hold their spare money in the Bank’s virtual vaults would have to pay money to do so. The idea is that this forces them to lend their extra cash out to the benefit of the economy.

“I would say that this is, I think, the first time the Bank of England has said definitively, yes they’re in the toolbox,” Bailey said. “We don’t have a plan to use them at the moment but they are in the toolbox.”

Bailey said the Bank had concluded that they could be useful in some scenarios. It came to a different conclusion in the financial crisis, but Bailey said: “10 years is a long time in monetary policy. That was a different crisis.”

However, as negative interest rates squeeze banks’ profits, the Bank could face opposition from lenders over the move.

Analysts had expected the MPC to leave monetary policy on hold. Rain Newton-Smith, CBI chief economist, said: “It’s unsurprising that the monetary policy committee kept its powder dry this time around.”

She said there were “early signs of a recovery gathering pace”. But she added: “Downside risks to the outlook are still looming large, so a ‘wait and see’ approach seems like the right one at present.”

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said it was a “missed opportunity” to support the economy.

“The recovery in consumers’ spending could have been reinforced today by targeted action to get borrowing costs down,” he said.

Banks strong enough to take Covid hit

Britain’s lenders are strong enough to keep giving out loans and take a big hit from during coronavirus, the Bank of England said in a new financial stability report that was also published today.

It said banks are likely to lose £80bn through bad loans. But it said they “have buffers of capital more than sufficient to absorb the losses”.

Since the financial crisis exposed banks’ weak balance sheets, central banks such as the BoE have forced them to keep more cash at hand.

The Bank’s financial policy committee (FPC) said UK lenders would need to take around £120bn of credit losses to deplete their capital. And that would take a GDP hit much bigger than the Bank expects.

Capital buffers have helped banks keep lending to companies during the coronavirus pandemic.

The FPC said companies could well face a “cash-flow deficit” of up to around £200bn. That is more than double its normal size, than Bank said.

So far, banks have lent about £70bn to cash-strapped firms, the BoE said. Deputy government Jon Cunliffe said it was in banks’ own interests to continue to support lend to hard-hit firms.

“The financial sector needs to continue to support the economy,” he said.

Harry Robertson

Source: City AM

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Two thirds of UK firms ‘fully operational’ after COVID, survey says

Two thirds of British businesses say they are now “fully operational” after the coronavirus lockdown, up from half in June, according to a survey on Sunday.

A further 21% of the firms, polled in the first half of July by the Confederation of British Industry (CBI), said they were partly operational with some premises still closed.

“With businesses gradually reopening, this month’s data seems to indicate a turning point for the economy,” said Alpesh Paleja, an economist for CBI, one of Britain’s main business lobby groups.

But many firms, especially those in consumer-facing sectors, remained in “acute financial distress”, he added.

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Britain’s lockdown has been slowly lifting since May, with the last major change on July 4 when hotels, pubs and restaurants were allowed to reopen.

However, on Friday Prime Minister Boris Johnson said he was postponing further relaxation, which would have helped some arts and entertainment venues, due to rising cases.

Businesses on average said they were operating at 85% of usual capacity due to social distancing, compared with 72% when a stricter rule generally requiring two metres of distance was in force.

Lack of demand from customers continued to be businesses’ most common challenge to resuming normal operations, the CBI said. More than two thirds of firms named it as a barrier to normal operations, down slightly from three quarters in June.

The Bank of England is due to set out new quarterly forecasts on Thursday, as different sectors of the economy recover at different rates from the unprecedented economic damage.

Whether the main barrier to growth is lack of consumer demand, or businesses’ difficulties meeting it, will be key to the central bank’s decisions on stimulus later this year.

Reporting by David Milliken

Source: UK Reuters

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FLA sets out recovery plan for UK economy

The Finance & Leasing Association (FLA) has published its recovery plan for the economy, Shaping the UK’s future prosperity: Recognising the opportunities for recovery.

The FLA has recommended a phased approach of short, medium and long-term measures that will position the UK to meet the government’s key objectives of achieving a net-zero, low carbon economy by 2050, enhancing economic productivity, and creating diverse and inclusive prosperity by levelling up the regional economies of the UK.

The short-term imperative is to rebuild consumer and business confidence, which begins with ensuring that lenders are in a position to lend during the recovery.

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In recognition of the fact that the assistance provided to customers in the form of payment deferrals means that the availability of new lending to help fund the recovery will be curtailed, especially in the case of non-bank lenders, the FLA has proposed several measures:

A Treasury Forbearance Liquidity Support Scheme to offer funding to lenders to deliver the liquidity they need to help to their customers.

An extension of the government guarantees for business and consumer lending until Spring 2021.

Reform of the British Business Investment (BBI) Direct Lending Scheme so that it works for a wider range of specialist funders of small the medium enterprises (SMEs) and consumers who do not have access to Bank of England support.

In the medium-term, the FLA proposed the reintroduction of the Annual Investment Allowance’s previous £1m limit, with no taper, to support businesses growth across the UK; the acquisition of new equipment would also enhance productivity and accelerate the move to more energy-efficient assets.

The FLA recommended that the long-term priority be to improve the regulatory regime so that it can provide protection in times of crisis, rather than act as an obstacle.

The FLA therefore proposed an overhaul of consumer regulation – specifically the Consumer Credit Act – to make it fit for purpose in the digital age, and to allow for the innovation of new finance products.

Stephen Haddrill, director general of the FLA, said: “The Chancellor’s Economic Statement set out a range of short-term stimuli, but these measures need to be consolidated with substantive plans for long-term growth – and all of this must start with ensuring that the UK’s providers of business and consumer finance are in a position to lend.

“This is not the case at the moment and without their input, the recovery on high streets and industrial estates will stall.

“We have set out a credible plan that puts the UK on a path to a more sustainable and prosperous future.

This is the point when businesses will be planning their next move in terms of investing in new equipment to make them more agile – the government needs to ensure that funders are in a position to support these ambitions, and that consumer finance lenders are in a position to support the demand for goods.”

By Jessica Bird

Source: Mortgage Introducer

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UK economy on course for V-shaped recovery, says Bank of England economist

UK economy is on track for a sharp V-shaped recovery thanks to a faster-than-expected rebound but “considerable” risks remain, according to the Bank of England’s chief economist.

Andy Haldane, who also sits on the Bank’s interest rate-setting committee, said the recovery in the UK and globally had come “sooner and faster” than expected.

In a webinar speech on Tuesday, Mr Haldane said the UK economy was benefiting from a rebound in consumer spending since lockdown restrictions have begun to ease.

He said: “It is early days, but my reading of the evidence is so far, so V.”

He added: “The recovery in both the UK and global economies has come somewhat sooner, and has been materially faster, than in the Monetary Policy Committee’s May Monetary Policy Report scenario – indeed, sooner and faster than any other mainstream macroeconomic forecaster.”

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But he said there was the risk of a “vicious cycle” in the economy if unemployment proves to be higher than expected and warned against a return to the mass youth unemployment seen in the 1980s.

He said: “Risks to the economy remain considerable and two-sided.

“Although these risks are in my view slightly more evenly balanced than in May, they remain skewed to the downside.

“Of these risks, the most important to avoid is a repeat of the high and long-duration unemployment rates of the 1980s, especially among young people.”

His comments come after the Bank recently said it now expects gross domestic product to tumble by 20% in the first half of the year, which is far less than the 27% it predicted in its May forecast.

But governor Andrew Bailey warned at the time against getting “carried away” by signs the recession may not have been quite as steep as it expected, with the Bank launching another £100 billion of quantitative easing (QE) to help boost the economy.

Mr Haldane was the only one on the nine-strong Monetary Policy Committee to vote against increasing QE in the June meeting.

In his speech, he said if the economy continues recovering on a similar path as lockdown measures ease further, then the loss in annual GDP could be far lower than first feared, at 8% against 17% forecast in May.

But he cautioned some of this may be down to pent-up demand, as well as the massive Government support for households and businesses through the scheme to furlough workers on 80% pay.

With nine million workers currently furloughed, he said there was a risk of soaring unemployment when the Government support measures end, which could impact the path of recovery.

Mr Haldane said he remained “open-minded” about more action to boost the economy.

Official figures also on Tuesday showed the economy shrank by more than first thought between January and March, down 2.2% – the largest fall since 1979.

Data has shown GDP contracted by a record 20.4% in April, but Mr Haldane said this was “ancient history” with the UK and global economy now fully in the recovery phase of the crisis.

Source: Express & Star

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UK economy set to return to growth in third quarter after coronavirus chaos

The UK economy’s coronavirus-induced downturn eased in June as key health indicators hit a four-month high, according to a closely-followed survey.

The UK’s economic output hit a measure of 47.6 on IHS Markit’s flash purchasing managers’ index (PMI), a four-month high.

Anything below 50 represents a contraction. But it was a stark improvement from May’s score of 30 after April’s lockdown saw the UK economy sink to an all-time low score of 13.8.

IHS Markit’s chief business economist, Chris Williamson, said it was a sign the UK looks set to return to growth between June and September.

“June’s PMI data add to signs that the economy looks likely return to growth in the third quarter, especially given the further planned easing of the lockdown from 4 July,” he said.

“June saw a record rise in the PMI for a second successive month,
confirming that the economy is moving closer to stabilising after the worst of the immediate economic impact from the Covid-19 pandemic was felt back in April.”

The pound was broadly flat against the dollar this morning to stand at $1.2462.

It follows earlier PMI showing the eurozone economy also hit a four-month high, led by France’s recovery.

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Manufacturers lead UK recovery

The manufacturing sector led the UK’s June recovery to post growth of 50.8. But the UK services industry slipped again, though not nearly as badly as it did in May. The industry posted a score of 47, compared with May’s 29.

The UK’s private sector also said confidence hit a four-month high in June as firms raised their expectations for the year ahead.

Easing of lockdown restrictions amid the coronavirus pandemic helped UK economic activity improve after its April collapse.

Uncertainties loom for UK economy

But industry figures told IHS Markit underlying demand remained “very subdued”, with cutbacks in spending holding back business activity.

And Williamson warned the UK economy’s longer term prospects are plagued by uncertainty.

“Demand clearly remains weak, as indicated by a further steep decline in backlogs of orders and an ongoing fall in new orders,” he said. “Many Covid-19 restrictions and social distancing measures will also need to stay in place until an effective treatment or vaccine is available, curbing demand in a variety of service sectors in particular.

“Uncertainty over recovery prospects and job prospects also mean demand for many goods, especially non-essential big-ticket items, is likely to remain weak for many months.”

Doubt over whether the UK can strike a trade deal with the EU before the Brexit transition period ends in December 2020 is also a worry for firms.

That led IHS Markit to forecast the UK economy to contract by 11.9 per cent this year before expanding by 4.9 per cent in 2021.

‘Solid start’ to UK economy’s recovery

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the June data suggests a solid rebound in GDP. But he warned gains will be harder to come by as the UK economy struggles to return to normal.

“A range of daily data are consistent with output rising significantly in June, after a sluggish start to the recovery in May,” he said.

“Nonetheless, the pick-up in activity partly reflects firms working through backlogs of work that accumulated during the peak of the pandemic. In addition, firms still are cutting headcounts rapidly.

“With restrictions to suppress Covid-19 likely to impose a hard ceiling on activity in certain sectors of the economy until a vaccine is found, and low levels of consumers’ confidence pointing to elevated saving, a full recovery in GDP in the second half of this year remains unlikely.”

Pantheon Macro stuck to its base case that GDP will stand five per cent below its pre-lockdown peak in the fourth quarter.

Thomas Pugh, Capital Economic’s UK economist, added that the pace of the UK economy’s recovery was pleasing.

“The economy seems to be recovering a little quicker from its nadir in April than we had first expected,” he said. “This trend should continue in July as bars, restaurants and cinemas will probably be able to open from 4 July and a reduction in the official social distancing measure from 2m to 1m would allow those firms that are open to serve significantly more customers. “

By Joe Curtis

Source: City AM

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We must be ready for further stimulus, says Bank of England’s Andrew Bailey

The Bank of England and other policymakers must be ready to take further action to help the UK’s economy because of the risk of the coronavirus shutdown causing long-term damage, governor Andrew Bailey has said.

“We are still very much in the midst of this,” Bailey told broadcasters today.

His comments come after new data showed the UK’s economic output tumbled over 20 per cent in April, suffering the largest drop since records began in 1997 as the coronavirus lockdown brought many sections of the economy virtually to a halt.

“We hope that will be as small as possible but we have to be ready and ready to take action, not just the Bank of England but more broadly, on what we can do to offset those longer term damaging effects,” Bailey said.

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While the fall in April – when the economy spent a full month under lockdown – was dramatic, the big question was how much long-term damage this would inflict on Britain’s economy, he said.

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Bailey said the record drop in GDP was close to the central bank’s expectation for the month, and reiterated his view that some early signs of economic recovery have emerged since then.

The Band of England is expected to announce an expansion of at least £100bn in its bond-buying firepower when its Monetary Policy Committee meets next week in order to limit the damage caused to the economy by the Covid-19 pandemic.

The central bank has already spent the bulk of the record £200bn expansion to its asset-buying programme, which was launched in March.

While the BoE has reduced interest rates to an all-time low of 0.1 per cent in a bid to mitigate the economic impact of the virus, it has not been willing to follow other central banks in setting negative rates.

This decision means that the Bank’s main tool for combatting the coronavirus-induced recession is its bond-buying programme.

Speaking earlier this week, Bailey said the recession triggered by the pandemic will be “different” to others.

“If there is any such thing as a normal recession… this one will be different. There will be elements of a faster recovery, because the first stage of the recovery is literally lifting restrictions and allowing people to go out,” Bailey said at a panel hosted by the World Economic Forum.

By Anna Menin

Source: City AM

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Sterling holds near $1.27 as UK plans re-opening, short positions increase

Sterling rose against the dollar on Monday, as plans to ease coronavirus lockdowns in the UK and signs the economy may bounce back due to pent-up demand kept the currency just below the $1.27 touched late last week.

Analysts warned, however, that Brexit remains a risk for the pound – which has rallied for seven consecutive days against the dollar – as talks with the European Union fail to make progress.

The pound has risen 2.8% against the dollar this month as several economies re-open from lockdowns, weakening demand for the U.S. currency.

British Prime Minister Boris Johnson is planning to relax rules on outdoor dining and weddings, as well as speeding up government investment plans to limit the economic damage from the coronavirus, newspapers reported on Saturday.

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The Sunday Times said Johnson wanted to relax planning restrictions that stop many pubs, cafes and restaurants from using outside areas, and also to make it legal to hold weddings outside.

The number of British shoppers in early June indicate pent-up demand for shopping in physical stores as the coronavirus lockdown is eased, industry data showed on Monday.

Britain went into lockdown on March 23 to slow the spread of the pandemic, with all retail stores deemed non-essential forced to close.

By 0828 GMT, sterling was up 0.15% against the dollar at $1.2686, just below Friday’s $1.27. It was weaker against the euro by 0.12% at 89.10 pence.

“Sterling-dollar remains anchored around the 200-day moving average of $1.2660/65. But it seems that bar the broader weak dollar and positive risk environment, investors currently lack any major catalyst for the pound to move materially above this key level,” said Viraj Patel, FX and global macro strategist at Arkera.

“We could see the pound tread water around these levels in absence of any further positive catalysts and investors take stock of what will happen next in broader markets – especially ahead of the Fed meeting later this week. However, with Brexit headwinds also coming to the forefront of investors – the risks are mildly tilted to the downside for the pound this week.”

Johnson is willing to accept European Union tariffs on some UK goods in an attempt to win a trade deal and break the deadlock in talks with the EU, the Daily Mail reported. Britain’s chief negotiator, David Frost, had made a new offer, the newspaper said, citing sources.

According to the offer, the UK would accept tariffs on a small number of goods in return for the EU’s dropping its demand that Britain continue to follow EU rules.

Speculators increased their net short position on sterling in the week to last Tuesday, CFTC data showed on Friday.

Reporting by Ritvik Carvalho

Source: UK Reuters