This Thursday, September 23rd, the Bank of England (BoE) joined a relay race after the U.S. Federal Reserve (Fed) had made its move towards monetary tightening. The U.S. monetary policymaker clearly indicated that it is going to taper quantitative easing before the end of this year.
The BoE did not point to any additional monetary stimulus measures in its statement, as it kept its interest rate unchanged at 0.1% together with the 895 –billion-pound ($1.23 billion) bond purchase program. Analysts polled by Reuters did not expect any changes in the BoE’s monetary policy at its September meeting.
However, two of the eleven BoE governors within the Monetary Policy Committee (MPC) voted to cap government bond purchases at 840-billion-pounds rather than putting the full 875-billion-pound programme into effect. The BoE also said in its statement that the case for higher interest rates "appeared to have strengthened" as the forecast for inflation for the end of 2021 was lifted to over 4%, which is double the targeted percentage.
No BoE’s MPC member has voted to decrease the bond purchase programme so far. So, investors may consider such an intention as a possible early tapering of the QE programme. At first sight, the statement did not seem to be alarming, but it seems to have another tone after the Fed declared its clear intentions to cut its stimulus program by the end of 2021.
The reaction of the Pound was clearly stronger than the U.S. Dollar index showed on Wednesday. The GBPUSD surged from 1.3612 to 1.3750 despite a clear announcement from the Fed about the bond buying program. Technically, the reaction of the Pound was in line with the correction after the last downward trend that held since the beginning of June. Such a correction has reached a 38.2% Fibonacci retracement level from September 14. This level also has a strong resistance, a low from September 9.
So, the GBPUSD may continue its downward movement even if the Pound rebounds to the 1.3800-1.3830 area, which may be used as a good selling point with the first target at 1.3700. If the Cable plunges below this level, the pair may decline to 1.3600. But in this case the Greenback has to play the first role.
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