Pound weakens as BoE prepares for corporate bond purchase

The UK Office for National Statistics stated that the consumer prices in the UK increased 0.6% y-o-y in August. The reported increase was a notch below the analysts’ estimates, but in line with the inflation rate reported for the previous month. The Pound strengthened against other currencies, primarily based on the inflation data.

The difficulty faced by the Bank of England in acquiring the bond for purchase under the quantitative easing program that began last year also supported the rise of the Pound against several major currencies including the Canadian dollar. On the contrary, speculation of a Fed rate hike kept the Canadian dollar weak.

Ultimately, the GBP/CAD pair hit a high of 1.75232 on Thursday. However, going forward, the situation is expected to change in a drastic manner as detailed underneath.

Reuters

The Bank of England officially confirmed that it was not facing any issue this week in acquiring government bonds for its quantitative easing program. In fact, the volume of bonds offered was thrice the quantity intended for purchase by the Central bank in the reverse auction. To be precise, Bank of England was offered debt valued at 3.759 billion pounds ($4.96 billion), against the 1.17 billion pound debt it sought. The comfortable cover ratio of 3.21 indicates that the Central bank will not have any issues in completing its bond purchase program.

Furthermore, the Central bank also stated that it will start purchasing corporate debt from September 27th onwards. The BoE intends to purchase as much as $13.3 billion worth corporate debt. In all, 300 securities, which are eligible for purchase, were listed by the BoE. The 100 overseas companies in the list include the tech giant Apple Inc., biotechnology firm Amgen, Daimler AG (Germany) and Dong Energy AS (Denmark).

Ultimately, the corporate bond purchase is expected to weaken the Pound and increase the inflationary pressure.

On the other hand, the Canadian dollar is expected to strengthen due to the dovish comment made by the member of the Fed rate setting committee. The crude oil’s range bound price movement between $40 and $50 no longer creates any significant impact on the Canadian dollar. Thus, we forecast a decline in the GBP/CAD pair in the short-term.

The chart indicates strong resistance for the GBP/CAD pair at 1.74850. The stochastic reading of about 80 indicates that the currency pair remains in an overbought state.

Thus, we forecast the GBP/CAD pair to decline to the support level of 1.7230.

A currency trader can take a short position near 1.7450 levels in the GBP/CAD pair and position himself to benefit from the probable decline. To decrease the risk, the trader can place a stop loss order above 1.7550. If the pair falls as forecasted, then the profit for the trade can be booked near 1.7230.

A one touch put option can be traded to earn from the GBP/CAD pair’s downtrend. With a target price of 1.7230 or higher and validity of the contract extending till the second week of October, a binary trader can hope to see the put option expire in the money.

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