Thursday, March 26, 2020

Will BoE officials be unanimous on easing policy further if needed?

  • Dollar
  • Pound
  • Bank of England


Analysts’ Pick: Will BoE officials be unanimous on easing policy further if needed?

  • Expect BoE’s monetary policy to remain unchanged, with focus on the meeting minutes instead
  • Dovish BoE officials and easing demand for the greenback will probably be the Cable’s drivers for the day
  • GBP/USD looks likely to be able to retest the 1.2000 resistance level today

While the economic outlook in the UK has worsened since the Bank of England’s (BoE) last scheduled meeting in January, we do not expect the central bank to make any changes to its current policy as it has already conducted multiple easing actions in the past few weeks.

The BoE cut rates to levels lower than the 2008 Financial Crisis


The BoE cut its official bank rate twice in March following the sudden surge in coronavirus cases in Europe and the UK. The first was a 50bp cut from 0.75% to 0.25% on March 11th and then another 15bps from 0.25% to 0.10% on March 19th for a total of 65bps. The central bank also increased its asset purchase program (or quantitative easing program) to 645bn pounds from 435bn pounds, the largest ever increase. The Term Funding Scheme, was also introduced earlier this month to offer low cost loans to commercial banks to incentivise SMEs to borrow at lower rates.

Rate of the virus has exploded in major countries across the EU and is starting to increase in the UK


At the current stage, what we are looking for instead will be BoE officials outlook on the British economy, which we expect to most likely be tilted to the downside in the near-term as a result of the virus outbreak before moving towards a v-shaped recovery as the effects of policy easing and stimulus packages from the British government kick in towards the second half of the year.

But the market expects this, with overnight index swaps implied probabilities of a rate cut at less than 1%. Instead, the BoE's statement and meeting minutes for both today's meeting and the meeting on March 19th that will also be released today is likely be in focus. We expect the minutes to show officials to be unanimous in easing policy to support the economy if needed.

Investors no longer expect a rate cut from the BoE this year


As a result, our outlook for the GBP/USD currency pair is tilted towards the upside thanks to a likely confirmation of BoE officials' readiness to utilise various monetary policy tools to help support the economy in today’s meeting minutes and also as the demand for the greenback starts to ease. The Fed extending its asset purchase program to corporate bonds as well as starting a direct loan program targeted at corporations has managed to put some downward pressure off the dollar as demand for cash skyrocketed following a lockdown across multiple states in the US. Furthermore, as the US has just approved an additional US$2tn worth of stimulus for the US economy, we do expect the dollar to weaken against other major currencies in the near-term.

Demand for dollar starting to slow down after the Fed’s unprecedented actions to purchase corporate bonds


GBP/USD may rise to retest the resistance level of 1.2000 later today as the BoE releases its meeting minutes. This represents an upside potential of roughly 0.61%. But due to the recent volatility in financial markets, the currency pair may trade within a larger range of prices, i.e. between 1.1855 to 1.2000.

Technical Analysis:


Cable just rose above the 23.6% Fibonacci retracement level and is likely to trade in the 23.6% to 38.2% Fibonacci band in the short-term as bulls start to regain momentum and try to retest resistance levels in the band. Today’s meeting minutes may provide a boost for bulls to retest the 1.2000 resistance level. But with the bears consistently retesting the support level of 1.1833, we may see the Cable fall back below to range in the 0% to 23.6% Fibonacci band. 

Support: 1.1833 / 1.1753 / 1.1656

Resistance: 1.2000 / 1.2017 / 1.2096

GBP/USD Chart (H4)