Where to Next for the GBP at Historically Low Interest Rates?
The Bank of England Slashes Interest Rates to Boost Economic Activity
On Thursday, 4 August 2016, the Bank of England Monetary Policy Committee (MPC) voted unanimously in favour of cutting interest rates. The 25-basis point rate cut dropped the bank rate to 0.25% – its lowest level since 2009. The cable – the GBP/USD pair – is trading at 1.3142 at around 10:15 AM USA ET, after falling from 1.3338 at 11:38 AM GMT time. The sharp drop in the exchange rate saw the GBP plunging as low as 1.3115 at 3:01 PM GMT, before staging a mini recovery towards its current level. The resilience of the sterling has surprised many analysts in the currency trading arena. Prior to the rate cut, there were calls for a $1.25 exchange rate, which would be lower than the 31-year low that the currency pair reached post-Brexit.
Major quantitative easing measures adopted by MPC
The MPC wants to see inflation rates rising in the UK, as the economy is effectively in the midst of a technical recession. This is defined as two consecutive quarters of declining economic growth. Brexit concerns are weighing heavily on the minds of MPC members, as well as the Governor of the Bank of England, Mark Carney. Sweeping measures were adopted on Thursday, 4 August 2016, including a £60 billion stimulus over and above the £375 billion asset repurchases program. This brings the total asset purchases to £435 billion. The Bank of England also announced that it would be purchasing UK corporate bonds valued at £10 billion over and above other quantitative easing measures. Heading into the Super Thursday decision, economists were all but convinced of a 25-basis point rate cut, but the uncertainty swirled around the additional measures – asset repurchases that would be implemented.
Performance of the GBP against a basket of currencies
The GBP was naturally weakened by the prospect of cheaper sterling on the global markets, and it reacted accordingly. Now, the Bank Rate in England, Wales, Ireland and Scotland is 0.25%. The GBP moved sharply lower against a basket of currencies. At the time of writing, the GBP was trading against other currency pairs as follows:
- GBP/USD currency pair down 1.441% at 1.31345
- GBP/JPY currency pair down 1.733% at 132.71000
- GBP/DKK currency pair down 1.397% at 8.76430
- GBP/AUD currency pair down 1.785% at 1.72470
- GBP/CHF currency pair down 1.416% at 1.27795
- EUR/GBP currency pair up 1.422% at 0.84855
While the GBP/USD currency pair reached a low of 1.3115 in the morning session after the rate decision was made, it clawed its way back some respectability as the day progressed. The pair was hovering around the 1.3175 level where it stabilised. The additional stimulus measures adopted by the Bank of England MPC helped to move the pair lower, but the stability of the GBP has been notable. An important level to monitor is the 1.3200 level, which also coincides with the 200-hour SMA. On the flipside, the 1.3100 handle is the support level for the currency pair and if the GBP/USD pair weakens, it could slide towards 1.3060, or 1.3070.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.