GBP/USD fails to sustain gains as BoE ready to increase stimulus

GBP/USD is trading modestly higher on the day after two members of the Bank of England (BoE) voted in support of increasing the stimulus. Sterling initially surged above $1.24 but it has now settled around the $1.2350 mark.

Fundamental analysis: BoE leaves rates on hold, increases QE

As Invezz reported earlier, the BoE decided unanimously to leave its key interest rate at 0.1% at this morning’s board meeting. The Bank has also pledged to buy another £200bn of government bonds to support the embattled economy, although two BoE members voted to increase the purchase by an additional £100bn.

“According to the Bank’s Decision Maker Panel, companies’ sales are expected to be around 45% lower than normal in 2020 Q2 and business investment 50% lower,” it is noted in the minutes of the meeting.

What is even more striking, the BoE warned that the UK economy could shrink by 14% this year, with a contraction of as much as 25% this quarter. 

“The illustrative scenario incorporates a very sharp fall in UK GDP in 2020 H1 and a substantial increase in unemployment in addition to those workers who are furloughed currently,” the statement reads. 

Following the statement, the BoE Governor Andrew Bailey has reiterated that the bank is ready to “take action when needed”.

“You can see, both from what we said in March and what we said today, that there is clearly a commitment and a determination to take action should we need to do so,” Bailey told reporters after the meeting.

The unemployment may go as high as 9%, from the current 4%, the BoE warns. Analysts are now expecting a further increase in the QE stimulus at the next meeting of BoE in June.

“We look for an additional £100bn of QE to be announced at the June meeting,” analysts from TD securities said.  

Technical analysis: GBP/USD fails to sustain the momentum

Following the BoE statement, the sterling made strong gains by pushing above the $1.24 mark. However, this positive momentum quickly faded with the sellers erasing earlier gains. The price action trades around the $1.2350 mark in the aftermath of the statement and Bailey’s press conference. 

As seen in the chart above, the price action is forming an ascending triangle with the upper line being flat while we have three higher lows on the downside. The triangle’s support comes at $1.2330. On the upside, a confluence of resistance – the 200 DMA and triangle’s upper line – is located at $1.2640.

Summary

GBP/USD has failed to keep its head above the $1.24 handle after the BoE voted to leave its key borrowing rate unchanged at 0.1%. Two voting members of the BoE voted to increase the additional QE from £200bn to £300bn, signalling a potential hike in the QE volume at the June meeting.