After 22 months of sitting on their hands, the Bank of England (BOE) finally decided that it was time to act and give the U.K.’s economy a much-needed boost. On Thursday during their interest rate announcement, the BOE shocked the markets with a 75 billion GBP stimulus program.
As a result, the pound crashed across the board, with Cable giving up 200 pips in just a couple of minutes. Cable had fallen as low as 1.5300 before traders managed to bring it back up above the 1.5400 handle.
You’re going to hate me for this, but… I told you so!!
I have talked about this many times in the past, and if I recall correctly, I even gave the top 4 reasons why I think the pound would probably continue to fall 3 weeks ago. Since my warning, the pound has fallen more than 400 pips versus the safe haven Greenback!
In any case, the BOE’s decision to expand its quantitative easing program by 75 billion GBP and keep rates unchanged at 0.50% just shows how bleak the economic situation is not only in the U.K., but the rest of the world as well.
According to the central bank, the rate at which the global economy has been growing has been very slow. In addition, the euro zone debt crisis has inhibited the available credit for both consumers and businesses. Both of these factors are threatening the U.K.’s economic recovery.
Despite the bank’s bearish tone, the decision to carry out another round of easing was a tough one since inflation in the country is still pretty high. In fact, the inflation rate currently stands at 4.5%, more than two times the central bank’s targets.
Well, I guess the BOE’s move despite the rising inflation just goes to show how deeply troubled the U.K.’s economy has been.
So, what’s next for the BOE and Cable?
The additional 75 billion GBP in funds is expected to last for four months, so it’s reasonable to expect that the BOE will return to “wait-and-see” mode. I suspect the central bank will be wanting to see how the program affects the economy before making their next move.
As for Cable, I think traders will be hard-pressed to push it strongly in any direction. On the one hand, the additional program could stoke hyperinflation fears and lead to a weaker domestic currency.
On the other hand, the funds may just be what the U.K.’s economy needs. That being said, we may see a range form out of Cable in the next couple of days!
How about you, where do you think Cable is headed next?