In 2009, the BOE established the QE program termed Asset Purchase Facility to buy high quality assets, primarily Gilts and the Operational Standing Facility. The purpose of the OSF is to rescue interest rates when rates fall outside of the 50 basis point channel yet this event hardly occurred especially in the post 2009 world of currency trading. The total channel today is 16 basis points, 9 basis points alone in the UK’s repo market and 14 basis points to include Repo and other UK interest rates. Central banks mastered the perfection of the channels two years ago when the ECB went negative September 2014.
Private assets purchases up to 10 billion are authorized and explains Carney’s announcement to purchase corporate bonds. The 2016 Asset Purchase Facility balance sheet stands at 414 million, up from 404 million in 2015 and Gilts account for 374,907 million of the 414. Since 2012, the BOE purchased Gilts on a weekly basis 19 times since 2012 and for the most part has been absent from the market.
GDP last at 2.0% was lower than 2.3 reported in Q4, Q3 and Q2 2015 and 2.6% Q1 2015. The Office of Budget Responsibility reports in the March budget statement, GDP is expected 2.0 2016, 2.2 2017 and above 2.0 to 2020. Further, the Budget statement reads like Supply Side policies will again become the order of the day as corporate taxes are expected to cut to 17% by 2020. Capital gains taxes are slated for a cut from 28% to 20%. Government borrowing and deficits are expected to drop and surpluses are expected by 2019. Higher deductible allowances are expected for residents. Trump’s budget plan highlighted yesterday mimics the same Supply Side policies as the UK yet the UK has always been Supply Side focused in its budgets since at least 2010 and after the 2009 crisis. Overall, both budgets propose not only a bright economic future but a much needed end to Keynesian policies.
Yesterday’s GBP/USD base was located at 1.2876 and today 1.2516 as a significant drop occurred due to Monday’s first day to normalize interest rates after the Carney cut. Today’s bottom is located at 1.2926 with 1.2911 and 1.2916 as next bottom supports.
The first significant hurdles to longs are found at 1.3008 and 1.3005. A break then 1.3024, 1.3031, 1.3037 and 1.3044. Longs must clear 1.3069 or rallies are corrections for the day as GBP/USD price overall is extremely low both intraday and in the larger picture. The top of the channel is 1.3295 and a break must be seen to see a run to the most significant break point at 1.3592. GBP/USD and GBP/JPY remain at a + 98% and healthy Correlation.
Brian Twomey, Inside the Currency Market, btwomey.com. We’re doing trade signals and whatever needed, email@example.com