Bank of England drops rates - and GBPUSD still falls
Markets Forex

2 Likes 0 Dislike 2 Replies
1 year ago

The Bank of England today announced a host of measures aimed at supporting economic growth in the UK. First, the Bank reduced interest rates to 0.25% (they were at 0.5% earlier). Additionally, it announced a 100 billion pound scheme to ensure that the rate cuts actually reach borrowers. 

The Bank also announced that it would purchase 60 billion pounds worth of UK government bonds and 10 billion pounds of corporate bonds. The corporate bond purchase scheme would target those companies that are not part of the financial sector and are deemed to be contributing to UK's economy.

Interestingly, the Bank declared that its Monetary Policy Committee (MPC) has indicated that rates could be dropped further. This suggests that the Bank might be willing to consider  0% rates or even negative rates.

Despite this announcement of measures to support UK's economy, GBP fell by 1% against the US dollar. It appears that the Bank's downward revision of short-term economic growth projections had greater impact on GBPUSD than the slew of measures announced. This would suggest that the market is very pessimistic about GBP and the UK economy. 

What is your view regarding GBPUSD short-term rates? Do share your projections and analysis.

Posted 1 year ago 2 Likes   0 Dislikes

That's a very concise and useful analysis, Liam. Thanks!

I tend to agree with you on this. In line with your analysis, GBPUSD has indeed been trading lower over the last few days. It is currently trading at just 1.29721. Looking at the momentum of the price chart, further decline in GBPUSD cannot be ruled out.  

Posted 1 year ago 1 Likes   0 Dislikes

Ahh, the joys of Brexit !

I would say GBPUSD and possibly even EURUSD should either move lower or be range bound over the next 2 to 3 months at least. My logic is fairly simple - no major good news from UK or the rest of the Euro zone is expected in the next 2-3 months. On the other hand, there is good scope for more bad news - slowdown or anticipation of slowdown, companies provisioning for Brexit related events, some companies slowing down fresh hiring in the Euro zone due to the prevailing uncertainty/fear regarding Brexit, etc. 

Hence, chances of upward movement in GBPUSD and EURUSD are rather low. Still, some short term upward movement, followed by a quick correction, cannot be ruled out.