- Update – Pound falls further as property funds suspend redemptions
- Markets desert GBP ahead of BoE announcement – Traders look to Carney for reassurance
- GBP USD exchange rate at fresh low since referendum results – New 31-year low of 0.3114
- BoE relaxes capital buffers – Investors cheered by prospect of £150 bn additional lending
- Pound US Dollar recovery forecast – Pound may continue to erode US Dollar gains
The impending release of the Bank of England’s (BoE) Financial Stability Report pushed the GBP USD exchange rate to a 31-year low today. Meanwhile, the US Dollar (USD) advanced on safe-haven demand, as commodities slumped and bond yields around the world reached new historic lows.
GBP USD Back on the Decline as Standard Life and Aviva Suspend Property Funds
Three large UK property funds have now suspended activity today to prevent investors from withdrawing money. Standard Life, Aviva and M&G – the UK’s largest property fund, with a portfolio encompassing £4.4 billion in assets – have all seen a large increase in investors removing large amounts of capital as part of a mass desertion of the UK property market. Traders have been prevented from withdrawing their money from the fund to avoid creating a vicious cycle in which mass withdrawals significantly decrease the value of the fund, prompting other investors to remove their money, and so on.
M&G said in a statement that;
‘Investor redemptions in the Fund have risen markedly because of the high levels of uncertainty in the UK commercial property market since the outcome of the European Union referendum. Redemptions have now reached a point where M&G believes it can best protect the interests of the funds’ shareholders by seeking a temporary suspension in trading. This will allow the fund manager time to raise cash levels in a controlled manner, ensuring that any asset disposals are achieved at reasonable values.‘
GBP USD Exchange Rate Losses Tighten as Bank of England Relaxes Capital Buffers
Markets were focused on the Bank of England’s (BoE) Financial Stability Report and accompanying speech from Governor Mark Carney. Considering the widespread impact the ‘Brexit’ vote has had on global markets, investors across the world desperately awaited the Bank’s latest update. Anticipation of a dovish report saw the Pound plummet in the run-up to the release, with GBP USD falling further below the 31-year low reached after the vote for Brexit was announced, while GBP EUR was at its weakest since 2013.
While the Financial Stability Report contained multiple warnings, it also assured markets that the BoE was ready to provide the necessary support to the markets and the economy to ensure stability. Factors at risk included the UK’s current account deficit, commercial real estate market, household debt and subdued global growth. According to the report;
‘The FPC has monitored these channels of risk closely. There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.’
However, the Pound’s huge losses began to soften. This was thanks to the news that the BoE had relaxed the Countercyclical Capital Buffer (CCyB). The CCyB was put in place to help banks keep operating in the event of another recession by mandating that they maintain a certain level of capital in reserve. This would afford them the funds to keep operating during times of financial crisis, avoiding the need for further costly public bailouts that could cripple public finances; the UK public still owns around 10% of Lloyds bank.
With the BoE reversing the 0.5% increase in the CCyB, UK banks now have an additional £150 billion to lend out. The report also stated;
‘The Financial Policy Committee stands ready to take actions that will ensure that capital and liquidity buffers can be drawn on as needed, to support the supply of credit and in support of market functioning.’
Before the report was released, the Pound was down -1% against several of the majors, including the US Dollar, the Euro (EUR) and the Swiss Franc (CHF). The biggest loss for Sterling was a decline of -1.8% against the Japanese Yen (JPY).
US Dollar Pound Exchange Rate Bullish as Markets Demand Safe-Havens ahead of BoE Report
The US Dollar began the day on a bullish rise, as anticipation of the BoE report and subsequent speech by Mark Carney drove safe-haven demand. Before the release, the ‘Greenback’ had made gains of 1.1% against the Pound and the South African Rand (ZAR), as well as advancing 0.4% verses the Indian Rupee (INR) and the Norwegian Krone (NOK).
USD strength was demonstrative of the global demand for safe-haven assets. The risky Australian Dollar (AUD), New Zealand Dollar (NZD) and Canadian Dollar (CAD) were largely on the decline, while the Bloomberg and Rogers International commodity indices were down -0.9%. Bond yields also plummeted, with the US 10-year Treasury – considered a global benchmark – dropping to an historical low, while the Swiss 50-year bond entered negative territory.
Speaking on the path of the US Treasury yield curve, Westpac’s Head of Fixed-Income Research Damien McColough commented;
‘This is the most obvious manifestation of the global search for yield forcing investors further out the curve. The size of the drop in the 30-year yield reflects a bit of a capitulation trade, but I am not particularly surprised. The market is now trying to work out what the new range will be.’
Pound US Dollar (GBP USD) Exchange Rate Forecast to Recover Further on BoE Report
The Pound is gradually erasing losses following the release of the Financial Stability Report, which has calmed investor fears. Suggestions that GBP USD could hit a 34-year low today seem dovish now. US factory orders and final durable goods orders for May are due out this afternoon, but today’s BoE news is likely to dominate trader sentiment. GBP USD recovery could continue throughout the day, with ‘Cable’ potentially closing the session back in positive territory.
Current GBP, USD Conversion Rates
At the time of writing, the Pound US Dollar (GBP USD) exchange rate was trading around 1.3164, while the US Dollar Pound (USD GBP) exchange rate trended in the region of 0.7596.
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