The BOE Is Going To Cut Rates, This Is How You Profit

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The BOE Is Going To Cut Rates, This Is How You Profit

Rate Cuts Are “Plausible”

The pound weakened versus the world’s major currencies after another dovish cry from the BOE. Monetary Policy Committee member Michael Saunders says it is plausible the BOE could lower rates at the next meeting. The news is not a surprise, many in the community have been expecting a cut for some time. The UK economy is on shaky ground and the upcoming hard-Brexit is not going to help. There was very little UK-specific data this weak other than steel production, which is down, so traders have very little concrete information to work with.

Regarding the Brexit, PM Boris Johnson is steadfast in his position to take the UK out of the EU on October 31st with out without a deal. It is, in fact, that very pledge that got him elected to Prime Minister to begin with. The EU says they will not renegotiate the deal unless the UK can come up with some other solution to the Irish-Backstop. Even today, EU President Jean-Claude Juncker said it will be the UK’s fault if a no-deal Brexit unfolds.

The GBP/USD

The GBP/USD slipped on the Saunders news and set a new two week low. The low is below the short-term 30-day EMA and the 1.2325 support line so further downward movement is possible. The indicators are bearish and suggest prices could fall to the nest lower support target. The next lower support target is 1.2200 and likely reached within the next week or so, providing the data next week is still solid. In the U.S. I mean. U.S. PCE prices came out today as well, core PCE prices ticked higher to 1.8% and suggest the FOMC’s easing “cycle” may already be over. A firmer dollar would help accelerate the pounds decline and take it 1.2000.

The EUR/GBP

The EUR/GBP is moving up off of an extreme low set just a week or so ago. The low was driven by strengthening in the pound due to Brexit hopes that were compounded by a generally dovish expectation for the ECB. Now, the ECB has done some QE and my do more but there is a twist. The BOE is about to start cutting rates which could this pair shooting higher. In the near term, I would expect to see the EUR/GBP move up to test resistance near 0.8925. If prices break above the short-term EMA that would be bullish. If resistance is confirmed prices could drop back to 0.8800 very quickly, it just depends on what the BOE does.

BoE: Optimism isn’t going to cut it – Rabobank

The Bank of England MPC kept rates unchanged at 0.75% and there were no changes to the asset purchase facility. According to analysts at Rabobank, as Brexit will continue to cast its shadow on the UK economic outlook, the central bank should deliver two rate cuts in 2020.

Key quotes

“The policymakers noted a pick-up up in sentiment since the election and will be monitoring closely the extent to which these early indications are sustained. Yet, according to outgoing governor Carney, it’s less a case of so far, so good; and more a case of so far, good enough.”

“We don’t think that the uncertainty around a disruptive change to the UK’s trading relationships will vanish anytime soon.”

“The uncertainty is hitting the economy hard, which is why we continue to expect two rate cuts in 2020.”

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Bank of England cuts rates in emergency move

Fergal O’Brien and David Goodman , Bloomberg News

Government action will help combat COVID-19 more than BOE rate cut: Economist

The Bank of England cut interest rates in its first emergency move since the financial crisis and announced measures to help keep credit flowing through the economy, warning that the coronavirus outbreak will damage growth.

Governor Mark Carney and fellow policy makers voted unanimously to cut their main interest rate by 50 basis points to 0.25 per cent, returning it to a record low. In an effort to safeguard businesses that risk being hurt financially by the virus, they also introduced a new program to provide easy and cheap credit. They also reduced the amount of capital banks must hold in a further attempt to support lending.

“These measures will help keep firms in business and people in jobs, and they will prevent a temporary economic disruption from causing long-term harm,” Carney told reporters in London, sitting alongside his imminent successor as governor, Andrew Bailey. “This is a big package.”

U.K. stocks jumped after the decision, announced early Wednesday morning before the U.K. markets opened, which arrived a week after the Federal Reserve cut rates by the same amount and just hours before the British government will announce spending measures in its budget. The European Central Bank is expected to join the growing wave of easing this week after President Christine Lagarde warned leaders on Tuesday that the crisis has echoes of 2008.

Carney said that the package is intended to achieve “maximum impact,” and warned the BOE is prepared to take further action if necessary. Bailey said that policy will be under “constant review and consideration” and insisted that there is more space available for easing.

What may appeal to investors is that the BOE not only delivered a large rate cut like the Fed, but also targeted aid to businesses and banks who could feel fallout from a drop in demand because of the virus. The U.K. response also stands out with the level of coordination between the central bank and the government — a synchronization which may again please markets and serve as a model for other economies.

The BOE’s package involved a program of added funding for banks incentivizing them to lend to small and medium-sized companies, which — based on a similar scheme in 2020 after the Brexit vote — could provide more than 100 billion pounds (US$129 billion) of aid.

The FTSE 100 Index climbed 1.6 per cent, while the pound initially dropped as much as 1.3% against the euro to the weakest level since October, before paring almost all of its losses.

“The only slight surprise is that there is no forward guidance about the next policy move,” said Allan Monks, an economist at JPMorgan in London, who predicted the rate cut and measures to support bank lending.

Monks argued officials are probably still prepared to lower borrowing costs again at its scheduled meeting on March 26 if the situation worsens. “And although not currently our call, the next step for the BOE beyond then is QE if required.”

What Bloomberg’s Economists Say.

“No one can accuse the Bank of England of leaving things to chance in the face of the coronavirus outbreak. It’s now up to Chancellor the Exchequer Rishi Sunak to deliver in the budget later today. If, as is widely expected, he does, the risk that demand weakness lingers after the virus shock will be reduced.”

— Dan Hanson and Jamie Rush

Wednesday’s action came in the last week of Carney’s tenure at the BOE. The Canadian will leave the bank on March 15, to be replaced by Bailey.

“Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months,” the BOE said in its early morning statement.

The new Term Funding Scheme to aid loans will be financed by the issuance of central-bank reserves. The BOE also pared the countercyclical capital buffer to 0%. That’s a reserve held by banks, and the reduction should free up cash for them to lend.

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