GBPUSD, H1
The BOE lowered rates to 0.10%. The BOE says it will increase holdings of government bonds (new QE). The vote was unanimous. It has been a traumatic first week for the new Governor Andrew Bailey. Cable leapt to 1.1650.
Earlier the Pound posted a fresh 35-year low against the Dollar at 1.1451. The UK currency has also hit fresh 11-year lows against the Euro, and has generally been performing similar to a commodity currency during the phases of acute risk-off positioning in global markets. The UK runs a relatively big currency account deficit, and this exposes the currency during heightened risk aversion. We saw this during the 2008 crisis, when the BoE’s real effective exchange rate measure of the Pound tumbled by 16% in the three months following the collapse of Lehman Brothers in September 2008.
There are three aspects to the current account, one being the net balance of currency remittances, another the trade balance, and the third being the net balance of investment flows. The imbalance between foreign investors holding UK assets versus UK investors holding foreign assets, and the returns thereof, is the source of the Pound’s risk-off underperformance. During times of high stress, the net investment flow — what is needed to finance the deficit — turns from being UK-inward to UK-outward. (In the Dollar’s case, the currency is underpinned despite the US current account deficit, due to its role as the world’s reserve currency). Some market narratives have also been mooting that Brexit has rendered the Pound more vulnerable. New BoE governor Andrew Bailey picked up the reins on Monday. His first Monetary Policy Committee meeting was scheduled for next week when a further 25 bps cut looked likely, but with today’s unscheduled move and the significant expansion in the QE programme this might now be unnecessary. The UK government this week announced a GBP 330 bln coronavirus rescue package.
Click here to access the HotForex Economic Calendar
Stuart Cowell
Head Market Analyst
Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
