GBP/USD - Pound Slides As BoE Cuts Rates, Expands Asset Purchases

|
Includes: FXB, UDN, UUP
by: Dean Popplewell

By Kenny Fisher

The British pound has posted sharp losses on Thursday, following the historic decision by Bank of England to lower interest rates. GBP/USD has lost 150 points and is currently trading at 1.3170. The pound is under strong pressure so the downward trend could continue. The BoE has also expanded its asset-purchase program to 425 billion pounds. In the US, today’s highlight is Unemployment Claims, with the indicator expected to remain steady at 265 thousand. On Friday, US employment numbers will be in the spotlight, with three key releases – Average Hourly Earnings, Nonfarm Employment Change and the Unemployment Rate. Traders should be prepared for possible volatility from GBP/USD following these important employment releases.

The Bank of England has lowered interest rates for the first time since 2009. The quarter-point cut has lowered the official bank rate from 0.50% to a historic low of 0.25%. The BoE has also expanded its asset-purchase program for the first time since July 2012, from GBP 375 billion to GBP 425 billion pounds. A rate cut had been widely expected, especially after the BoE surprised the markets in July when it did not make a move. Had the bank again remained on the sidelines, it risked losing credibility at a time of economic and political instability in the UK. The surprise Brexit vote in June, in which the British electorate voted to leave the European Union, shook the financial markets and the economic fallout, which is just beginning to be measured, is expected to be significant. The BoE is trying to cushion the repercussions of Brexit, and has cut rates and expanded asset purchases in an attempt to stabilize the economy and promote consumer confidence and spending. In making these moves, BoE Governor Mark Carney is showing that he “means business” and is willing to take significant monetary steps in order to right the listing British economy.

Almost lost in the excitement leading up to the BoE rate decision were the British PMI reports, which continue to point to contraction. This has raised concerns about the health of the British economy. On Wednesday, Services PMI posted a second straight contraction in July, with a weak reading of 47.4 points. However, the pound didn’t react as this reading matched the forecast. Other sectors of the economy have fared no better, with readings below the 50-level, which indicates contraction. A special Manufacturing PMI report was published on July 22, covering the 4-week period immediately following the Brexit vote. The index dropped to 49.1 points. The negative trend has continued, as Manufacturing and Construction PMIs for July failed to break above the 50-level. There are growing worries that additional third quarter numbers, including GDP reports, will point to a weakening British economy due to the fallout from Britain’s surprise decision to leave the European Union.

US employment numbers for July started off in the right direction, as ADP Nonfarm Payrolls improved to 179 thousand, beating the estimate of 171 thousand. However, the ISM Non-Manufacturing PMI disappointed, as the index dipped to 55.5 points, missing the estimate of 56.0 points. On Thursday, we’ll get a look at Unemployment Claims, followed by the all-important Nonfarm Payrolls on Friday. Market sentiment has soured on the US dollar since last week’s GDP report, as the gain of 1.2% was well short of the forecast of a 2.6% gain. The markets have circled September and December as the most likely dates for possible rate hikes. The Fed and the markets will be keeping a keen eye on wage growth and payroll reports on Friday, and if these numbers are sharp, the likelihood of a September rate hike will increase.

GBP/USD Fundamentals

Thursday (August 4)

  • 7:00 BOE Inflation Report
  • 7:00 MPC Official Bank Rate Votes. Estimate 0-9-0. Actual 0-9-0
  • 7:00 BOE Monetary Policy Summary
  • 7:00 BOE Official Bank Rate. Estimate 0.25%. Actual 0.25%
  • 7:00 BOE Asset Purchase Facility. Estimate 375B. Actual 425B
  • 7:00 MPC Asset Purchase Facility Votes. Estimate 0-0-9. Actual 6-0-3
  • 7:30 US Challenger Job Cuts
  • 7:30 BoE Governor Mark Carney Speaks
  • 8:30 US Unemployment Claims. Estimate 265K
  • 10:00 US Factory Orders. Estimate -1.8%
  • 10:30 US Natural Gas Storage. Estimate 3B

Upcoming Key Events

Friday (August 5)

  • 8:30 US Average Hourly Earnings. Estimate 0.2%
  • 8:30 US Non-Farm Employment Change. Estimate 180K
  • 8:30 US Unemployment Rate. Estimate 4.8%

*Key releases are highlighted in bold

*All release times are EDT

GBP/USD for Thursday, August 4, 2016

GBP/USD August 4 at 7:15 GMT

Open: 1.3326 High: 1.3345 Low: 1.3276 Close: 1.3170

GBP/USD Technical

S1 S2 S1 R1 R2 R3
1.2938 1.3064 1.3142 1.3219 1.3359 1.3513
Click to enlarge
  • GBP/USD showed limited movement in the Asian session and has posted sharp losses in European trade
  • 1.3142 is providing support. It could be tested if the pair’s downward movement continues
  • 1.3219 has switched to resistance following sharp losses by GBP/USD

Further levels in both directions:

  • Below: 1.3142, 1.3064 and 1.2938
  • Above: 1.3219, 1.3359 and 1.3513
  • Current range: 1.3142 to 1.3219

OANDA’s Open Positions Ratio

GBP/USD ratio has shown gains in short positions. Currently, short positions have a majority (55%), indicative of trader bias towards GBP/USD continuing to lose ground.

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.