The Bank of England is to try to scale back the market support. Will it work?

13 October 2022 334
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The pair GBPCHF collapsed at the end of September, justifying the expectations of the weakness of the pound. However, the scale of the fall was unusually impressive - GBPCHF almost reached parity level before the Bank of England took measures to support the national financial market. And tomorrow the British regulator will try to curtail these measures. What will this mean for the pound?


Emergency measures to buy government bonds helped in stabilization of the financial market of the United Kingdom, and the pound rebounded strongly from historical lows. However, the problems of a sharp increase in the budget deficit and the cost of borrowing have not gone away. Rather, these problems have temporarily faded into the background. And when the market support from the Bank of England stops, the probability of a new wave of asset sales denominated in pounds is very high.


Based on this, the situation can develop according to 2 main scenarios:


1) Redemption of bonds on Friday will indeed stop. After that, all that is left to do is to wait for new panic sales and the return of the Bank of England to market support measures.


2) Seeing the seriousness of the situation, the British regulator will proactively announce the extension of the redemption of government bonds at least until the end of October (as pension funds have already asked him to do).


In any case, the growth of market volatility is guaranteed. At the same time, it is best to act after the GBPCHF bounces up. After all, betting on updating the lows is very risky, given that the Bank of England can intervene at any time and support the national currency.


On the side of the franc, first of all, its status as a safe-haven currency (which is extremely relevant this year), as well as the tightening of monetary policy by the Swiss National Bank.


Opening a position may look interesting in case of a new bounce up towards the local maximum of 1.1285. And as a downside target, yesterday's GBPCHF low just below 1.09 can be highlighted.


Following option for a trading strategy may be offered:


Sell GBPCHF on the rise to 1.1285. Take profit 1 - 1.112. Take profit 2 - 1.09. Stop loss - 1.14.


Also, traders can use Trailing stop instead of a fixed Stop loss at their discretion.

This content is for informational purposes only and is not intended to be investing advice.

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