GBP/USD riding on the coattails of a surprise Fed cut

Following a mixed day on Friday, the US dollar is decisively lower at the start of the week with the news of the Fed cutting rates to zero ahead of when the market was expecting and, consequently, GBP/USD is higher by over 1% in Asia. 

At the time fo writing, GBP/USD is trading at 1.2400 on the nose between a range of 1.2262 and 1.2421 and remains bid as we head towards the Federal Reserve presser where we expect the chairman to announce that the decision was taken in a coordinated effort to not only support the US economy but global financial markets as well. 

The Federal Reserve on Sunday cut its benchmark rate by a full percentage point to near zero and will boost its bond holdings by $700 billion. Bloomberg reports that the US central bank also announced "several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent."

QE on the way

Markets already got an inkling that QE was on the way from last week's huge liquidity injections that had already underlined the Fed’s willingness to aggressively deal with “temporary distortions”. We could hear datils of what the Washington Post published at the open today, that "in the coming months, the Fed will purchase at least $700 billion more in bonds as part of its new quantitative easing. The majority of that, at least $500 billion, will be U.S. Treasury bonds. The rest will be mortgage-backed securities."

Meanwhile, only better news on the prognosis for COVID-19 will return us to “normality”, although the central bank's coordinated efforts should be appreciated by the markets, justified by aggressive responses that can always be reversed.

BoE in focus

As for the Bank of England, after an initial dip on the surprise timings of a 50bps Cash Rate cut, in general, currencies have been reflecting a broader sense of global risk sentiment which has seen the US dollar build up a safe haven bid. The cut was likely already expected in due course, but not markets are wondering of a possible shift towards 10-15bps in OIS markets in BoE meetings over the coming year.  "The BoE were actually quizzed as to why they had not cut to that perceived terminal rate. They responded that the current package was deemed as sufficient and they serially referred to their actions as a “Big Package”," analysts at Westpac noted.

GBP/USD levels