British pound bounces as BoE buying gilts stems havoc for now

The British pound did a pretty pirouette after the Bank of England (BoE) stepped into the bond market on Thursday, buying Gilts.

While a rally in GBP/USD may have been welcomed by some, it was unable to be sustained and stalled under the previous peak of 1.0931.

The BoE said, “the purchases will be carried out on whatever scale is necessary,” to achieve, “its financial stability objective.”

To an extent, a hazardous and treacherous situation appears to have been avoided in the near term with yields peeling lower and GBP/USD gaining some ground.

It should be noted though that both markets have not fully retraced the damage that was done by the announcement of loosening fiscal policy by the Chancellor of the Exchequer Kwasi Kwarteng.

Traders appear unconvinced that BoE intervention in the Gilt market is going to be enough to stem the tide of heightened risk of investing in the UK going forward.

Political pressure is being brought to bear on the UK government and it is being reported that Kwarteng has been meeting with many large financial institutions in the City about his proposals.

The International Monetary Fund (IMF) and US Treasury have voiced their concerns. A backdown on the slated large tax cuts would appear to be the path of least resistance.

The logic of the UK government is hard to fathom at this stage of the cycle. The governments of all other developed market economies are working to reduce their pandemic accumulated debt obligations, not increase them.

Additionally, the BoE is tightening monetary policy to bring down wealth destroying high and volatile inflation. A loosening of fiscal policy undermines that endeavour.

The carnage of the initial change in fiscal policy and then the intervention yesterday has ricocheted through global markets.

GBP/USD was already under the pump prior to this bout of policy twist as the US dollar has been underpinned by a Federal Reserve that has doubled down on their inflation fight.

While the action in the Gilt market saw Treasury yields shave 13 - 24 basis points across the curve, they remain at historically high levels and remain supportive of the ‘big dollar’ overall.

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