British Pound falls vs Euro, Dollar as threat of further cuts looms

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Pound sterling was notably lower on Tuesday as the Bank of England commenced its quantitative easing programme.

Investors rushed to sell bonds to the Bank of England on Monday after it revived its quantitative easing asset purchase programme for the first time in nearly four years

The strong demand for UK government debt from the Bank prompted the cost of UK short-term yields to rise, which in turn forced lower the yield these bonds pay.

Ten-year and five-year yields hit new record lows of 0.603 per cent and 0.152 per cent respectively.

British government debt (Gilts) outperformed their German and US equivalent, with 10-year treasuries offering the biggest yield premium over Gilts since 2000 at almost a full percentage point.

As the yield differential between the UK on the one hand, and the Eurozone and US on the other, grows, so too does the downside pressure on the Pound.

Typically higher-yielding jurisdictions command stronger currencies and UK yield is headed in a GBP-negative direction.

The majority of forecasts for coming months, as provided by the leading institutional research houses, do envisage a notably lower exchange rate ahead thanks to this dynamic.

The more pro-GBP predictions for GBP/USD see the exchange rate hitting a low of 1.27 on a six month timeframe, while an example of the more pessimistic views factor in 1.20.

“We continue to expect GBP/USD to remain under pressure following the Bank of England’s comprehensive package of easing measures announced last Thursday and we think data in the week ahead will likely signal that the UK economy was slowing even before the Brexit vote,” says a note from BNP Paribas.

The BNP Paribas STEER model signals 2y swap rates are the key driver of GBP/USD and, while UK rates are unlikely to fall much further, analysts see considerable scope for US rates to rise.

“We still target the pair well below 1.30 by the end of Q3,” says BNP Paribas.