The British pound ended the day down slightly against the US dollar on Thursday, though the pair remains above key support at 1.40. GBP/USD initially fell sharply on news that the Bank of England cut rates in line with expectations by 50 basis points to a record low of 0.50 percent. The BOE suggested that they would hold a neutral stance going forward as their policy statement said that “a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system,” and while this provided some bullish potential for the UK’s currency, news that the BOE was about to pursue quantitative easing had the opposite effect. Indeed, the Monetary Policy Committee (MPC) decided to start purchasing assets worth 75 billion pounds, which would be financed by the issuance of central bank reserves. According to the policy statement, “Part of that sum would finance the Bank of England’s programme of private sector asset purchases through the Asset Purchase Facility, intended to improve the functioning of corporate credit markets. But in order to meet the Committee’s objective of total purchases of 75 billion pounds, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market. It is likely that the majority of the overall purchases by value over the next three months will be of gilts.” Ultimately, this has bearish implications for the British pound because it will bring down medium and long-term interest rates, but traders should also consider that because risk trends remain the primary driver of price action in the forex markets, a resurgence in risk appetite could lift GBP/USD.
For the day's economic developments visit our Daily Fundamentals.
