STRATEGY : BUYING DIPS.
The big story this past week for cable was the Bank of England's decision to combine 25bp rate cut with 60 billion government bond buying program and also a new initiative to buy 10 billion pounds of corporate bonds. This of course sent a strong message to the market which drove sterling down against all the major currencies. The Bank of England gave more than expected because they felt by acting early and comprehensively, the MPC can reduce uncertainty, bolster confidence and support the necessary adjustments in the U.K economy. According to Mark Carney, the central bank felt that the outlook for growth had weakened materially since the Britain's decision to leave the European Union. In all, the Bank of England's outlook is grim which is part of the reason they felt the need to do more than market anticipated. However, the tone of Governor Carney's comments was not overwhelmingly dovish. The central bank is ready to lower the bank rate further if needed and increase all elements of the package but Carney made it clear that the lower bound interest rates is above zero as he is not a fan of negative rates. Carney sees helicopter money as "flight of fancy" and doesn't see a scenario where negative rates is discussed and as such, if they were to ease again, it would be in other ways and perhaps through additional bond purchases. Definitely before additional measures are considered, BOE would like to see the impact of the current stimulus in the economy. With that in mind, cable should still experience some weakness in days ahead especially against the crosses and one of such is the EURGBP.
EURGBP has a window to accelerate higher since completing a potential medium term correction at 0.6930, it's ironically following the same price action as Sterling's exit from the EMR in 1992 into the trend-line from 0.9800 high at 0.8115. This should ideally represent the first leg of a new uptrend. The corrective pullback to 0.7560 could well then have set up a potential acceleration to 0.8750 equality target. However, 0.8100-0.8300 consolidation should set a platform to rally again. However, a loss of 0.7995 would suggest EURGBP is still following the 1992 template with a break back down to 0.7500.
