GBP surges as the BoE purchases gilts prevents immediate chaos. What follows?

Sep 29, 2022 840 AM +05:00
VOT Research Desk

Key Insights and Analysis

The British pound has benefited from the intervention of the BoE; the Bank of England has prevented market panic, but policy obstacles remain; and the US dollar has lost some of its gains.

After the Bank of England (BoE) bought Gilts on Thursday, the British pound did a pretty pirouette.

Some may have welcomed the GBP/USD rally, but it was short-lived and stopped below the previous peak of 1.0931.

In order to achieve “its financial stability objective,” the BoE stated that “the purchases will be carried out on whatever scale is necessary.”

With yields falling and GBP/USD gaining some ground, a risky and perilous situation appears to have been avoided in the near future to some extent.

Traders appear to be unconvinced that BoE intervention in the Gilt market is going to be sufficient to stem the tide of heightened risk of investing in the UK going forward. However, it should be noted that neither market has fully retraced the damage that was done by Traders.

The UK government is under political pressure, and it is being reported that Kwarteng has been meeting with a lot of big financial institutions in the City to discuss his proposals.

The US Treasury and the International Monetary Fund (IMF) have expressed their concerns. The most likely course of action would appear to be to reverse the planned substantial tax cuts.

At this point in the cycle, it’s hard to understand the UK government’s reasoning .All other developed market economies’ governments are working to lessen rather than increase the debt they have accumulated as a result of the pandemic.

In addition, the Bank of England is tightening monetary policy in an effort to reduce volatile and high inflation, which is destroying wealth. That endeavor is undermined if fiscal policy is relaxed.

Global markets have been rocked by the devastation caused by the initial change in fiscal policy and the intervention yesterday.

Prior to this round of policy twists, GBP/USD was already under pressure because the US dollar has been supported by a Federal Reserve that has intensified its fight against inflation.

Although the Gilt market’s actions reduced Treasury yields by 13 to 24 basis points across the curve, these yields remain historically high and continue to be supportive of the “big dollar” as a whole.

Time : 07:34:35 – Daily