A Forex View From Afar

BOE Policy

As the Bank of England is reaching the shores of conventional monetary policy, it now tries to use and implement new measures in order to pull the U.K. economy out of the recession.

Starting this week, the BoE might start buying commercial paper, in order to bring the borrowing yields down to levels that are in-line with normality. In normal market conditions, which we are currently not, central banks operate through buying and selling government issued debt. Now, the major central banks from across the world have expanded these rights.

From now on, the Bank of England would be a major player in the corporate debt market. The BoE plans to act both in the primary and in the secondary corporate bond market. This, in turn, will help the corporate environment by bringing the yields down on existing bonds (throughout the secondary market), and assure cheap liquidity in the primary market.

This decision will certainly aid the U.K business environment, helping some companies avoid debt rating downgrades and running out of cash. As such, the U.K. financial system might gain some more strength, which should theoretically help the U.K. pound. Until now, the sterling has been responsible for both positive and negative news streaming out of the U.K. financial system.

The pound’s outlook lies on the upside in the following period. The market (and thus the pound) might get a big push forward from the stimulus plan vote, which will help the markets buy risk, and sell the safety of the dollar. In the short run, the 1.48-1.49 level will be very important for the pound. In that area, the pair faces an important swing area and a trend-line that holds the pair from early November. If it breaks higher, the pound has a clear path towards 1.53-1.55 area.

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