GBP/USD wavers after the dovish BOE interest rate decision
- The GBP/USD is wavering as traders react to the BOE interest rate decision
- The bank left interest rate unchanged at 0.10% as expected.
- It also boosted the target of its quantitative easing program to £875 billion
The GBP/USD pair is wavering today as traders react to the outcome of the Bank of England (BOE) monetary policy meeting. It is trading at 1.2960, which is lower than yesterday’s high of 1.3140.
UK economic growth easing
The UK is going through a rough patch, as evidenced by the recent economic numbers. The public debt has grown to more than £2 trillion, leading to a rate cut by Moody’s. Also, the unemployment rate has climbed while inflation remains low.
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The government has also announced a major lockdown in England as it tries to deal with the new wave of the virus. Indeed, the number of cases has been on an upward trend, reaching a high of 1.1 million this month.
All this is an indication that the third-quarter’s growth will pause as evidenced by the latest PMI numbers. According to Markit, the services PMI dropped from 56.4 in September to 51.6 in the previous month. That was an important figure considering that the sector is responsible for more than 70% of the economy.
Bank of England decision
It is against this backdrop that the Bank of England held its meeting this week. In a statement today, the bank voted unanimously to leave interest rate unchanged at 0.1%. At the same time, the members voted to increase the ceiling of quantitative easing from the previous £725 billion to £875 billion.
Still, some analysts are questioning whether the bank has more room with its asset purchases program. For one, it now owns about 44% of all outstanding government debt. That is almost double the US treasuries that the Fed owns. According to its guidebook, the bank can still increase this figure to 70%.
In the statement, Governor Andrew Bailey said that the bank will implement more tools to support the economy. Analysts believe that this includes negative interest rates. Indeed, according to the Financial Times, he overnight index swap forward rate is pricing in interest rate at -0.10% in the next few years.
The idea behind negative rates is simple. It would lower the cost of borrowing and mortgages, which would stimulate spending. Also, it would stimulate spending by disincentivising people from saving. In a statement, the bank said:
“The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”
Later today, the Fed and the Norwegian central bank will also deliver their rate decisions.
GBP/USD technical outlook
On the daily chart, we see that the GBP/USD price has been in a tight range after it dropped to a low of 1.2858 yesterday. The price is at the same level as the 25-day and 15-day moving average. It is also slightly higher than the lower side of the pink channel. Most importantly, it is above the ascending support that connects the lowest levels in May, June, September, and November. Therefore, I suspect that the upward trend will continue as bulls aim for the next resistance at 1.3200. Learn more about technical analysis here.