BoE Passes on Rate Cut; Promises Package of Stimulus Measures in August

The GBP/USD spiked to a two-week high on Thursday after the Bank of England kept its benchmark interest rate unchanged. Traders were surprised by the move. As many as 60 percent of those surveyed ahead of the Monetary Policy Committee meeting thought the central bank would cut rates by at least 25 basis points.

However, the move increases the odds of a rate hike next month. The Bank said it was likely to deliver stimulus in three weeks’ time, possibly as a “package of measures”, once it has assessed how Britain’s June 23 vote to leave the European Union has affected the economy.

The British Pound soared to $1.3480 against the U.S. Dollar, up a little more than 2 percent, after the policy announcement. However, sellers then came in to drive the Forex pair back to 1.3325.

The EUR/GBP plunged on the news to .8247 before rebounding back to .8327, down 0.0108 or about -1.27%. The EUR/USD firmed on the news to its highest level since July 5 and the September U.S. Dollar Index fell sharply.

British Pound traders now feel the currency may push back to the $1.3500 to $1.3600 area before the next wave of selling comes in.

Support for the Japanese Yen eroded as the global equity rally stretched into a sixth day, driven by increased demand for higher yielding assets. The USD/JPY rose to a high of 105.927, bringing it closer to the pre-Brexit high of 106.789, on increased speculation the Bank of Japan could take steps to fund government spending directly.

Over in the Pacific region, the NZD/USD fell after central bankers said they would issue an economic update before next month’s policy meeting – an unusual step read by some as a sign the Reserve Bank was preparing to cut rates.

August Comex Gold plunged to a fresh two-week low in reaction to the strong pop in global equity markets. Since gold is a competing asset, it tends to lose ground during stock market rallies because investors sell gold and invest the proceeds into higher-yielding assets.

The easing of tensions in the U.K. after the Brexit referendum also contributed to the weakness. Britain has a new prime minister which eliminated a political obstacle while expectations of more stimulus from the Bank of England brought relief to those worried about the state of the economy. Traders remained bullish about the long-term prospects for the metal because of the uncertainty surrounding the negotiations over the actual U.K. exit from the European Union.

September Crude Oil futures recovered slightly from yesterday’s steep sell-off, mostly supported by a weaker U.S. Dollar. However, traders cautioned not to read too much into the recovery because of lingering concerns over slowing demand and the huge supply.