Breakdown of the latest developments on the global exchanges
Sep 17, 2020, 11:55 AM GMT

The BOE Continues to Ride on the Expectations for a Soft Brexit Negotiations

The Monetary Policy Committee (MPC) of the Bank of England expectedly decided to maintain the Official Bank Rate unchanged at 0.10 per cent.

The Committee vowed to preserve a loose monetary policy stance in the foreseeable future until it receives clear indications that the economy is moving towards solid employment gains complemented by robust inflationary pressures nearing 2 per cent.

Moreover, the MPC decided to follow global trends set by other central banks by refraining from scaling up its underlying asset purchase facility at the present moment. The BOE will therefore continue to purchase bonds and other treasuries at the same pace, with the target remaining unchanged at £750 billion.

Arguably, the most important takeaway from BOE's September meeting is encapsulated by the Bank's current stance on the ongoing Brexit negotiations.

As it was revealed in its statement, the MPC continues to build all of its economic projections based on the assumption that the UK manages to smoothly negotiate a trade deal with the EU before the final Brexit deadline, which expires on 1 January 2021.

Yet, recent escalations of tensions between London and Brussels threaten this scenario and highlight the tentative nature of the economic recovery in Britain. All can change in an instant for the BOE, in case that Boris Johnson and the British hardliners fail to reconcile their differences with their European partners.

"The outlook for the economy remains unusually uncertain. The MPC’s central projections in the August Monetary Policy Report assumed that the direct impact of Covid-19 on the economy would dissipate gradually. They were also conditioned on the assumption of an immediate, orderly move to a comprehensive free trade agreement with the European Union on 1 January 2021."

The nature of the uncertainty that currently looms over the recuperating British economy triggered an interim selloff of the sterling. As can be seen on the 4H chart below, the GBPUSD sunk below the 50-day MA (in blue).

The pair, however, continues to be trading above the 30-day MA (in green), which serves as a floating support. The GBPUSD is currently establishing a new downswing, as demonstrated by the downwards sloping regression channel.

In addition to the 30-day MA, the middle line of the channel represents another prominent support. The price action could yet rebound from either of the two.

If, however, the price action penetrates below the two, then the next target level for the emerging downtrend will be encapsulated by the major support at 1.27400.