BOE cut rates, as markets begin to consolidate

By Eliman Dambell

 

In one of his first moves as the Governor of the Bank of England, Andrew Bailey decided to cut interest rates to 0.1%. This cut is the second time the bank has made a decision to lower rates within the last 2 weeks.This cut sees the interest rates in the UK at an all time low, a move which came on the back of seeing the Pound reach $1.15 against the US Dollar. Which was the weaker GBP has been since 1985. So with this cut now implemented, will this be enough to see markets to settle, and raise the confidence of consumers?

The 2008 financial crisis ended with the rhetoric that central banks could have done more to rescue the markets. Mainly by not letting Lehman Brothers go bust, which many still believe was the catalyst for the 2008 crash. 12 years later, and this time, central banks the world over have thrown all they can from a fiscal perspective into the markets, in hopes of saving the day.

The decision made by the BoE comes days after the UK treasury committed a £330bn warchest to help rescue businesses and consumers being impacted financially by the COVID-19 crisis.

How have markets reacted?

After the move, we saw an initial move from the GBPUSD currency pair with GBP gaining some bullish strength. The Pound briefly moved from $1.14 to $1.17 in a 4 hour period, before reverting back to the $1.14 level to close the day. The uncertainty in the short term to fiscal policy decisions within this period has generally seen markets respond with Panic, yesterday in the UK was no different. Markets have been viewing such actions as a confirmation that the situation has reached a point where it is uncontrollable. As a result, have panicked, which has been highlighted with the price volatility within markets.

However as the time of crisis extends, this is starting to become the norm, and huge swings in price, although still prevalent, have lessened. Markets have started to consolidate, which shows in some respect the fiscal and political moves being made are slowly taking affect.

As seen on the GBPUSD chart above, after the recent sell off, which saw the cable rate hit lows not seen since the days of Margret Thatcher, prices have started to level out. This typically happens for 2 reasons. Firstly the level of uncertainty in markets creates a lack of direction, in that price increases, then decreases at equal speed and time. Secondly, that markets are comfortable, or starting to find ground in a particular range.

Typically with markets at these lows, traders remain optimistic that they may be a turnaround if and potentially when the volatility created by the Coronavirus, begins to fade. This optimism comes as history has shown that the cable rate has been above $1.32 for the majority of the last 20 – 30 years when markets were settled.

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