The Monetary Policy Committee (MPC) of the Bank of England joined the FED and the RBA as the next major central bank to reduce its level of interest in a bid to negate the negative impact from diminished economic activity.
In an unscheduled gathering earlier today, the Committee decided to cut the rate by 50 basis points to 0.25 per cent. The decision itself is not that surprising in light of the current environment. Rather, it is its suddenness that surprised market experts.
“The MPC voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves.[…] The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.”
The adjusted monetary policy is aimed to act as insurance in case the COVID-19 situation were to deteriorate quickly. Yet, it is not driven by solely economic reasons, which is potentially creating a ticking timebomb, that can explode at a later stage.
Due to the resulting market surprise, the pound tanked immediately after the news was released. The GBPUSD temporarily broke down below the range's lower boundary, but afterwards, it reversed itself promptly.
Currently, the cable is attempting to close above the psychologically important 61.8 per cent Fibonacci retracement level at 1.29332, which is acting as a major resistance level.
GBPUSD 1H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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