Following a record 20% drop in economic output in April and a big jump in jobless claims over the past couple of months, policymakers at the Bank of England were widely expected to announce more stimulus at the conclusion of today’s meeting to combat the slowdown. Most analysts including myself, were expecting the Bank to leave interest rates unchanged, at 0.1%, but to increase its bond-buying programme by around £100bn to £745bn.
Lo and behold, the BoE has done just that!
So, interest rates have been kept unchanged in a unanimous vote, but there was a dissenter in the decision to expand QE, with Chief Economist Andy Haldane voting against the increase.
As this was in line with estimates, the GBP/USD bounced sharply off the lows and the FTSE lost some of its earlier gains.
The BoE’s decision should not have come as surprise. Everyone was expecting a shocking economic performance in April and weakness in subsequent months. However, the extent of the economic slowdown was probably a surprise, even to the BoE — which is why they had to act now and do more to help accelerate the recovery, now that the economy is opening up again.
But I think the increase of £100 billion in quantitative easing was a safe option to opt for. Given that other major central banks have taken even bolder steps in recent months, the BoE could have been a little braver and opted for £200bn or even more. The £100bn wouldn’t last too long, and many economists believe the real, longer-term, economic problems are going to emerge later in the year. However, the BoE thinks the second quarter GDP drop could be less severe than thought.
Following the announcement, the pound was trading around 1.2550 as the news was already priced in. The cable remains inside its recent consolidation zone, despite its post-BoE bounce today. It needs to break a few overhead resistance levels in order to signal the resumption of the bullish trend, with 1.2650 and 1.2700 being the next key hurdles.
But it is possible for rates to turn lower again if the dollar catches a bid in the afternoon due to renewed Covid-19 concerns. However, if it gets to around 1.24ish, that’s where I would expect the potential weakness to end as this was the point of origin of the breakout at the start of the month. But if the cable then starts drifting below this level and holds there then the bulls may get in a spot of bother because the rising trend line will have broken, encouraging momentum-chasing sellers to pile the pressure.
