What would have normally been a straightforward, even uninteresting day for the army of GBP traders became a wild scurry for cover as the normally-conservative Bank of England decided to let its hair down throw a bit of cash about. The fact that this was entirely unexpected caught most of the market off guard and caused an almighty slide in the value of the currency which, prior to midday had simply been bobbing along in the expectation that the BOE would hold rates, which it did. What hadn’t been anticipated was the extraordinary announcement that the Bank intends to extend its asset purchase plan to 75 billion, extended from the 50 billion anticipated to be dripped out over the course of a few months.
The timing of the announcement took the market as much by shock as the BOE plans. Coming just a few days after the markets most recent turmoil it appeared to be a suicidal capitulation at a time where shocks are not taken lightly. Most had anticipated the announcement of these plans to be postponed until at least November when the markets may have been slightly more receptive. The Bank clearly wants to get this plan into action as quickly as possible and, on the back of yesterdays GDP growth rate of 0.1% it could be a move to prevent the negative growth fear that are engulfing the rest of Europe.
From a trading perspective today would have been one of those situations where, if you were lucky enough to have been on the right side of the drop then you may be sitting happy albeit lucky. If you were on the wrong side it would not have been a laughing matter. The speed of the decline created an immense amount of slippage for those retail traders able to close their positions but for others who chose to wait for a bounce, they would have been waiting for a while. Interestingly, despite the overshadowing of the actual bank rate by the news of the expanded asset purchase plans the BOE maintained that inflation was still on course to hit 5%. This reduces the likelihood of a rate cut any time soon and news that the European central bank is also holding its rate at 1.5% would have been good news for those still bullish on the euro.
Looking at the charts, the GBPUSD was held up well by the support formed at these levels in September and December 2010. From a technical perspective it should be due some consolidation from today’s large losses although there are likely to be plenty of bears wanting to drag it down to test the psychological 1.500 area. Today ended with the GBPUSD clawing back a large part of these early losses through the US session. The day ending with what could be interpreted as a bullish daily candlestick off the 1.5350 support but which should also be treated with caution. For what it may be worth there is also considerable divergence on the daily MACD but with such a steep decline this could be expected with the small bounce that we saw today.
Tristan Goldthorpe currently lives in Madrid working for an international private sector development consultancy. He completed a postgraduate degree in London two years ago and has since been studying, trading and writing about politics, economics and the forex markets in his spare time. His particular interests are the use of support and resistance to determine price movements and the tendency for markets to become over-extended. Over the past few years he has researched and experimented with different techniques and strategies and now enjoys analysing and discussing potential trade opportunities and fundamental economics.