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Pound Set for Pain Ahead as Negative Rate Talk Heats Up

By Yasin Ebrahim 

Investing.com – The pound was flat against the dollar on Thursday but will likely remain under pressure as U.K. bonds continue to indicate the Bank of England could cut rates to below zero.

The United Kingdom 5-Year fell below zero for the first time on Thursday, as traders continue to price in the Bank of England cutting rates to below zero from 0.10%.

The prospect of negative rates has gathered momentum after the U.K. sold its first government bond with a negative yield at auction this week and BoE policymakers said negative rates cannot be ruled out.

BoE Governor Andrew Bailey said Wednesday that negative rates were being considered alongside other measures.

While a further increase in quantitative easing by the Bank of England at its June 18 meeting should be taken as a given, negative rates hinge on the speed of U.K. recovery, Jefferies (NYSE:JEF) said.

As well as negative rates, the pound's decline has been exacerbated by ongoing worries about Brexit, with talks between the U.K and EU yielding little in the way of progress so far.

The UK's chief negotiator David Frost said there had been very little progress on talks after both sides wrapped up the third round of Brexit talks last Friday.

The U.K has until June 30 to extend negotiations, but Prime Minister Boris Johnson has not expressed any willingness to seek an extension, raising the risk that the U.K may not have enough time to secure a trade deal beyond the transition period, which ends Dec. 31.

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