GBP up despite BoE confirmation it will stop bond-buying

[MongiIG]

Bank of England governor, Andrew Bailey, says the BoE will definitely stop its bond buying this Friday. There’s speculation that the pound is now rising because the government may be beaten into another humiliating u-turn.

 Jeremy Naylor | Writer, London | Publication date: Wednesday 12 October 2022 

Bond-buying to stop

The Bank of England (BoE) has stated firmly through the Governor Andrew Bailey, that it will not intervene any longer into the bond markets after Friday.

That had been the original schedule, that time of which they would stop funding the bond markets. There had been reports overnight from the Financial Times suggesting that there could be an extension, but this is now not going to be the case.

The BoE has been buying bonds to stabilise that price and prevent a sale, which could put some pension schemes at risk. Government borrowing costs remain close to levels seen at the height of the market turmoil last month, following on from that mini-budget statement we had from Kwasi Kwarteng - that was when the bank first stepped in.

GDP

Now, overnight, we've seen some GDP numbers which show that the growth that we had had has now turned into contraction. GDP contracted by 0.3% in August. Economists had expected it to remain flat. Three-month averages are down 0.3% against expectations of a 0.2% slide. So technically this is the beginnings of what could be the first stages of a technical recession here in the UK.

Industrial production numbers, also out overnight, fell by 5.2% in August. Now this was way below the expectations of a 0.6% slide year-on-year (YoY). So both these numbers add up to weakness for sterling.

GBP chart

But if we take a look at the chart, interestingly this is a 30-minute chart for sterling and you can see the bottom part of the trade was overnight when we saw it down at 109 23. Since then there has been this move up.

There had been this report overnight in the Financial Times. It pushed up sterling. But since then and this goes to 9:00 this morning, there was news coming through from the Bank of England that it was ready to vary the buffer rate in other direction if needed.

Now, this is a flexibility that the Bank of England can put into the markets, but it is not going to help out the bond markets by bond buying. And that is something which the Bank of England is quite firm on.

Now, where do we go from here? Well, we see this upward move in terms of 30-minute candles. And I'm wondering whether perhaps there is now expected to be extreme pressure brought to bear on Liz Truss' government to try and find a way around all this.

You cannot have the Bank of England raising interest rates at a time when the fiscal stimulus has been provided by the government in opening up the taps in terms of allowing people to have more money. You cannot have those two working opposite ends of each other.

And I'm wondering whether perhaps there could now well be some pressure being brought to bear on the government to change that policy. But currently trading over the 110 level against the US dollar at 11084.