BoE press the button on further stimulus

5 August, 2016

Market headlines and spectator attention around the globe was firmly focused on the monetary policy decision from the Bank of England (BoE) yesterday where the central bank made history by cutting interest rates to a new record-low at 0.25%. The BoE were far from completed with an interest rate cut with a distinct threat being carried through from BoE Governor Carney that bank rates can go lower if needed. While the Monetary Policy Committee (MPC) also announced further measures to stimulus growth imminently that includes an expansion to the asset purchase program and the introduction of purchasing corporate bonds. What personally attracted my attention was the comment that figures have now fallen to levels not seen since the financial crisis, which essentially means that the BoE have basically had enough with the recent downturn in data and this has encouraged a sharp reaction from the BoE.

There were also some distinct comments being made from Carney towards banks, which I personally see as a hint that these new rules must be passed onto consumers. This is basically because the BoE are fully monitoring the current threat that growth from external sources is heading for a decline, and this means that consumers must still remain encouraged towards borrowing and purchasing to support domestic growth. The BoE have acted because the economic outlook has changed markedly since the EU referendum and displayed some optimism that acting early should hopefully reduce uncertainty, however the public comment that Carney does not see a recession occurring at this point should avoid public scare.     

Where does the Pound go from here? Traders should be careful before expecting a further rush of downside momentum for the British Pound and the key technical magical number to watch is the major support zone located around 1.3050. This represents a significant psychological support level in the Pound and to be honest with you, we need a clean close below this level before we can begin talking about the Pound returning to its milestone lows just below 1.28. With that being said and with so many economic indicators continuing to focus on the negative impact following the unexpected EU referendum, momentum for the GBPUSD over the medium and longer term still appears heavily in favour of sellers.

For as long as the Pound fails to fall below 1.3050 against the Dollar a short term bounce higher in the currency can’t be ruled out of the equation. With that being said, the upside potential at this stage does appear capped to 1.34 with that meaning there is significantly less buying potential for the Pound at this stage than there is when we speak about potential longer term weakness. We actually need the GBPUSD to close above 1.35 for the possibility of a bullish correction in the Pound to be enabled and back towards the levels last seen on the evening of the EU referendum, otherwise and as stated above momentum for the GBPUSD over the medium and longer term is tipped in favour of sellers.  

What about the headline that the majority of the Monetary Policy Committee (MPC) expect interest rates to be near zero by the end of 2016? The threat that the MPC expect interest rates to be cut to near zero by the end of 2016 should deter investors from considering purchasing the Pound at a lower level. This is basically their way of communicating that there is still some further ammunition and scope to ease policy further, which is a relatively strong position to be in when we talk about other central banks and more closely to home the ECB reaching their limit on what possibly could be done from a monetary stimulus perspective to reinvigorate the EU economy.

Where are there investment opportunities? Gold has now returned relatively close to the milestone highs that were found in the post-Brexit uncertainty above $1350 and I personally believe that the metal has further upward appreciation potential before the end of 2016. There are a number of different reasons why I am personally still in favour of Gold as a safe-haven asset, which include reasons such as the recent resumption of selling in oil failing to be matched in the equity markets and the general uncertain external environment that has contributed towards global economy forecasts being downgraded on repeated occasions.

One factor that is worth mentioning is that the Dollar seemed reasonably supported during trading yesterday while the BoE were unleashing stimulus and dropping interest rates to a new historic low. This could be the theme of central bank divergence returning to the attention of investors once again, which is a theme that featured prominently throughout the opening period of 2015 and was directed around the Federal Reserve being in a position to at least talk about raising interest rates higher while the majority of major counterparts were still unleashing further stimulus. Some time has passed since then but not much has really changed when it comes to monetary policy direction, the Federal Reserve are still in a position to at least consider normalising monetary policy.

Regarding US interest rate expectations, today will represent a possible significant event when it comes to determining confidence in the US interest rate policy outlook for 2016. The latest US non-farm payroll report will be released this afternoon where the markets will be monitoring how many jobs were created for the US economy over the previous month, and we likely need a number above 200,000 to be provided with the necessary confidence that the Federal Reserve can raise interest rates at least once in 2016. US interest rate expectations have been pushed back once again over the past week and to be honest with you, it is personally beginning to feel like we are watching an endless merry-go-round that is repeatedly pushed back US interest rates..

Moving back to the United Kingdom and while most headlines are probably going to continue focusing on the negative impact the EU referendum impact is having on the UK economy, the delivery from the BoE yesterday and ongoing threat of further stimulus is probably going to provide a positive platform for the FTSE 100 over the remainder of 2016. This might sound strange at first when you consider that confidence in the economy is weakening, however we generally see an impact on equity markets when central banks ease policy and this is basically because there is easier accessibility to money in the system.        

All things considered this development when it comes to a shift if monetary policy direction represents a remarkable turnaround when also taking into account that it was just 18 months ago that expectations were high over the Bank of England becoming the first major central bank to be in a position to begin raising interest rates.    


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