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Bank of England to acquire UK long-term bonds to restore market conditions

September 29, 2022

US stocks rallied on Wednesday, regaining upside strength and ending their six-day slide after the Bank of England’s decision to stage a market intervention boosted UK bonds and tentatively calmed markets. The BOE decided to buy long-dated UK government bonds starting today to restore market conditions and later confirmed that it could buy just £1.025 billion in the emergency QE operation.

Therefore, the BoE’s decision supported the market sentiment and global markets enjoyed a break from the brutal selling that has gripped them since the Fed embarked on the most aggressive path of interest-rate hikes since the 1980s.

However, several US Federal Reserve officials lined hawkish, repeating the well-known message of another 75 bps coming up next. In the Eurozone, ECB President Christine Lagarde participated in a US-European GeoEconomics forum and said they would continue to hike rates in the next several meetings. Other ECB Governing Council members also openly favoured a 0.75% rate hike in the next meeting.

The benchmarks, S&P 500 and Dow Jones Industrial Average both advanced higher on Wednesday as the S&P 500 snapped a six-day rout and rose the most since early last month. The S&P 500 was up 2.0% daily the Dow Jones Industrial Average also climbed higher with a 1.9% gain for the day. All eleven sectors in S&P 500 stayed in positive territory as the Energy and Communication Services sectors are the best performing among all groups, rising 4.40% and 3.18%, respectively. The Nasdaq 100 meanwhile advanced with a 2.0% gain on Wednesday and the MSCI World index was down 0.1% for the day.

Main Pairs Movement

The US dollar declined sharply on Wednesday, failing to preserve its upside traction and dropped to a daily low below the 112.70 mark in the late US session after a positive turnaround in the global risk sentiment. But the downside for the US dollar seems limited amid the prospects for a more aggressive policy tightening by global central banks, including the Federal Reserve. The market focus now shifts to the German inflation data.

GBP/USD rebounded higher on Wednesday with a 1.42% gain after the cable touched a daily top above the 1.090 mark amid the Bank of England’s (BoE) efforts to cap the fixed income market. On the UK front, the Bank of England entered the bond market on Wednesday which aimed to stimulate the economy. Meanwhile, EUR/USD also staged a goodish rebound and refreshed its daily high near 0.974 level amid US dollar weakness. The pair was up almost 1.45% for the day.

Gold surged higher with a 1.91% gain for the day after climbing to a daily top above the $1,660 mark during the late US trading session, as a sharp pullback in the US bond yields weighed on the greenback and underpinned the safe-haven metal. Meanwhile, WTI Oil advanced higher with a 4.95% gain for the day after recovering towards the $82 area amid the risk-on market mood.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD rallied more than 1% over the previous trading day amid a broad-based Dollar sell-off. The short-term U.S. 10-year treasury yield retreated back 3.8% and is currently trading at 3.737%. Market participants rotated out of the U.S. Dollar into equities as equity markets rebounded off of fresh lows. All major U.S. equity indices rose more than 1%. A 75 basis point interest rate hike by the ECB is now being entertained as the E.U. continues to struggle with soaring inflation.

On the technical side, EURUSD has rebounded strongly off of our previously estimated support level of 0.96. Should the Dollar continue to weaken, EURUSD could head back above the 0.97 price region. RSI for the pair sits at 39.8, as of writing. On the four-hour chart, EURUSD currently trades below its 50, 100, and 200-day SMA.

Resistance:  1.0011, 1.0055

Support: 0.9550, 0.9400

GBPUSD (4-Hour Chart)

Cable rallied 1.45% over the previous trading day. The decision by the BoE to restart its bond purchasing program to control the Pound’s recent freefall has allowed the Pound to rise against the U.S. Dollar. The BoE’s plan to purchase longer-dated bonds to stabilize its currency, however, has attracted many criticisms, including comments from the IMF. The short-term decision by the BoE continues to raise our previous concerns about the health of British credit. Further widening its credit deficit could put the British economy under tremendous stress; furthermore, members of the British Finance ministry have come forward to confirm that there are no plans to reverse the cancellation of its latest tax policy.

On the technical side, GBPUSD has found support just below our previously estimated support level and is now consolidating around the 1.08 price region. Short-term resistance for the pair stands at the 1.1 price region. RSI for this pair sits at 29.34, as of writing. On the four-hour chart, GBPUSD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1.1561, 1.1854

Support: 1.08, 1.053

XAUUSD (4-Hour Chart)

Gold rebounded more than 1.8% over the previous trading day. The precious metal saw a surge in price as the U.S. Greenback witnessed a broad-based sell-off. The non-yielding metal found momentum as market participants rotated out of the Dollar and into equities. The macroeconomic environment for the yellow metal, however, remains unchanged. While Gold bulls can find a day of breathing room and profit-taking space, the short-term upward movement of Gold does not suggest a break away from its recent downward trend. Market participants will be paying close attention to the U.S. GDP data, scheduled to be released during today’s American trading session.

On the technical side, XAUUSD rebounded strongly from our previously estimated support level of $1619 per ounce and is now trading above our higher level of support for Gold at $1660 per ounce. Note that $1,660 could change polarity and become a short-term resistance for Gold. RSI for this pair sits at 35.7, as of writing. On the four-hour chart, XAUUSD currently trades above its 50-day SMA but below its 100 and 200-day SMA.

Resistance: 1695, 1724

Support: 1619, 1600

Economic Data

CurrencyDataTime (GMT + 8)Forecast
USDGDP (Q2)20:30-0.6%
USDInitial Jobless Claims20:30215K
CADGDP (MoM)20:30-0.1%
NZDRBNZ Gov Orr Speaks21:00