British Pound Forecast: Bank of England Ramps Up Bond Purchase Limit, GBP/USD Slips
11:45, 10 October 2022
Bank of England Announces Additional Liquidity Measures
The Bank of England has announced additional measures to support market functioning and reduce investor angst as the expiration of the Bank’s temporary backstop nears. In terms of the latest measures, the Bank stated that it will double the limit of gilts it is willing to purchase to GBP 10bln from GBP 5bln and will launch a Temporary Expanded Collateral Repo Facility, which will ease liquidity pressures facing LDI funds, running beyond the end of this week. As previously announced, the Bank reaffirmed that they plan to cease all bond purchases this Friday.
This looks to be an attempt by the Bank of England to get ahead of market pressures amid reports that UK Pension Funds would be selling assets in the lead-up to the BoE’s deadline. However, there still remains a concern about what happens after October 14th, particularly with gilt yields retracing over half the initial BoE-inspired drop. Alongside this, it is also up for debate whether these new measures will noticeably change market functioning. Keep in mind that the BoE has only made GBP 5bln worth of bond purchases from the GBP 65bln pledged. Therefore, if purchases remain low, this is unlikely to move the needle for markets.
What is your sentiment on GBP/USD?
UK 30YR Gilt Yield Chart: Daily Time Frame
GBP/USD Drifting Lower
As stated in the weekly outlook, the path of least resistance remains to the downside for GBP/USD with risks geared for a break below 1.1000. In turn, the bias remains a fade on rallies for Cable. Near-term support is situated at 1.1025 where a break below opens the door towards 1.0880-1.0920.
GBP/USD Chart: Daily Time Frame
This week, we will be hearing more from the BoE with a plethora of speakers scheduled, where market participants will be looking to gauge the MPC’s appetite for aggressive tightening in light of what has been priced in by markets, which as it stands is currently 110bps worth of tightening by the November meeting. To me, this remains far too aggressive for the BoE and with a terminal rate seen near 100bps above the Fed’s terminal rate, GBP/USD remains vulnerable to a hawkish disappointment.
BOE SPEAKERS THIS WEEK
Oct 11: Jon Cunliffe (1900BST), Andrew Bailey (1935BST)
Oct 12: Jonathan Haskel (0900BST), Huw Pill (1235BST), Catherine Mann (1800BST)
Oct 13: Catherine Mann (1200BST)