GBP plunges after Bank of England extra £100 billion stimulus

June 18, 2020, 14:28

On Thursday 18 June, the Bank of England added another £100 billion to its quantitative easing program taking its coronavirus stimulus plan to a whopping £745 billion. The bank also surprised many investors by deciding against taking interest rates into negative territory and keeping its main lending rate at just 0.1%. The British Pound (GBP) plunged immediately after the news announcement sending GBPUSD down to a 12-day low. Read on to find out what could be in store for the currency next!

 

Bank of England disappoints investors

Global central banks such as the US Federal Reserve and European Central Bank have publicly vowed they will do ‘whatever it takes’ to shore up their economies. Unfortunately, the Bank of England made no such commitment to investors, opting only to increase its Asset Purchase Facility (APF) buy £100 billion to £745 billion.

The bank’s bond-buying facility aims to shore up the UK economy while navigating the impact of the coronavirus pandemic. Investors were not only hoping for a bit more commitment from the bank but they have also been eyeing up the potential for negative interest rates. A tactic used by central banks to encourage borrowing and spending to get the economy moving.

In the latest Monetary Policy Summary, the bank decided to keep rates steady at just 0.1% which has already been reduced twice from 0.75% from the start of the coronavirus pandemic. Interestingly, many analysts believe the Bank of England will choose not to go down this route but rather increase its quantitative easing program and tweak credit provision facilities to make it cheaper for banks to lend to companies to get the economy firing once again.

The UK is currently the fifth-worst affected country from the impact of Covid-19. Investors were hoping for more from the Bank of England. This is just one reason the British pound dropped against all other major currencies with British pound against the Japanese Yen (GBPJPY) the worst hit. The disappointment between what the market was expecting and what the central bank gave is now providing some very interesting trading opportunities.

How to trade GBPUSD

Below is the long-term, monthly price chart of the British pound against the US dollar (GBPUSD):

Source: Admiral Markets MetaTrader 5, GBPUSD, Monthly – Data range: from 1 April 2005 to 18 June 2020, accessed on 18 June 2020 at 1:30 pm BST. Please note: Past performance is not a reliable indicator of future results.

With Admiral Markets UK Ltd you can trade Contracts for Difference (CFDs) on more than 40 different currency pairs and other asset classes. This product allows you to go long and short a market. You can learn more about the advantages and risks in the ‘What is CFD Trading?’ article.

The long-term downtrend of the currency pair above is quite clear. Different events such as Brexit and political frictions have weighed on the British pound for some time. However, it is the daily chart of GBPUSD that is providing some very interesting clues for traders.

Source: Admiral Markets MetaTrader 5, GBPUSD, Daily – Data range: from 4 October 2009 to 18 June 2020, accessed on 18 June 2020 at 2:30 pm BST. Please note: Past performance is not a reliable indicator of future results.

In the above daily chart of GBPUSD, the price has remained in a trading range for the last few months. This range, or consolidation, is shown the blue horizontal support and resistance line drawn onto the chart. What is most interesting is that the price failed to break to the downside on the 15 May but has also failed to break to the upside on the 5 June.

This recent failure also created a commonly used price action reversal pattern called a ‘shooting star’ candlestick pattern on 16 June. Both technical and fundamental traders now seem to have a bearish case for the British pound which could lead the market to fall even further and the bottom of this trading range. How will you be trading it?

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