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Thursday 4 August 2016

The Bank of England is preparing for the worst

During the last meeting of the Bank of England, the regulator did not disappoint those who counted on the generous incentives. The regulator has reduced the expected rate by 0.25%, while enhancing the program of buying assets to 375 billion up to 435 billion pounds. Surprisingly, it was the decision to buy not only the state, but also corporate bonds. The program will be applied within 6 and 18 months, respectively.
GBP/USD naturally weakened in response to the verdict of the monetary authorities, having lost the level of 1.32. The pair found support on the way to the level of 1.31, and is still under pressure.
In the aspect of longer-term prospects for the British currency, we should pay attention to the attitude of the Central Bank.
Firstly, the Central Bank sharply lowered its economic growth forecast for 2017 to 0.8%, while in May, GDP was expected at 2.3%. Such a grim assessment, combined with the increasing talk about a technical recession, create unfavorable conditions for the pound. Secondly, M. Carney made it clear that he is ready to further easing of policy in the future. It raises the issue of divergence rates of monetary policy of the Bank of England and the Federal Reserve. And although the issue of the next rate hike in the United States is still shrouded in fog, it is important to remember that in the United States we are talking about the normalization of monetary policy, but the British regulator after today's "warm-up" paves the way for further action in this direction.
The closest factor that may affect the expectations of the Fed's rates will manifest itself tomorrow and will have an impact on the dynamics of the GBP/USD and the dollar as a whole. Strong key report on the US labor market will strengthen the position of the US currency across the board. In this scenario, the pressure on the pound will continue and may worsen. Otherwise, we expect a restoration of the pair above the level of 1.32.




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