The Bank of England today became one of the only central banks to announce a stimulus package that appears to have, at least for now, exceeded market expectations and satisfy investors in a way that other central banks have failed this year. The triple whammy of a rate cut, an increase in bond buying – both government and now corporate – and a new term funding scheme against the backdrop of significant reductions to growth forecasts over the next couple of years clearly demonstrates how concerned policy makers are about the economic outlook post-Brexit. Given that these gloomy forecasts take into consideration the sizeable stimulus package announced, it clear that bumpy and uncertain road lies ahead, at least in the view of the BoE.
The market reaction to the stimulus package was significant but still the pound has continued to find support around 1.31 against the dollar. With this level not being broken even despite the BoE announcing a new substantial stimulus package and leaving the door wide open to further action before the end of the year – importantly, if the economy performs in line with expectations – you have to wonder what needs to happen for it to buckle. Of course, it’s worth saying at this point that so far we’ve only had the initial reaction to the announcement and compared to the near 2% decline that followed in cable, the rebound off the lows has been more of a dead cat bounce than a signal that the pair has bottomed. We could therefore see further pressure on the 1.31 support level in the near-term and if this is broken, the pair could be headed back towards the post-Brexit lows around 1.28.
We’ve also seen a strong reaction in UK bond yields following the announcement, with the 5 and 10-year yield hitting record lows, which again shows just how surprised investors were about the size of the stimulus package. This may also reflect the willingness and expectation of the BoE that this is not the end and that further stimulus is expected this year. The FTSE is also trading around 1.4% higher on the day, supported by the weakness in the pound that has driven it to outperform its European counterparts since the Brexit vote.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.