Today, the dollar is recovering its positions in the foreign exchange market after yesterday's fall. The Bank of England said it would make temporary purchases of UK government bonds with long maturities "to restore orderly market conditions." As part of the announced bond purchase program, the Bank of England will buy bonds with a maturity of more than 20 years: "initially, bonds worth up to 5 billion pounds will be bought at one auction."
On Wednesday, the Bank of England said it had purchased £1.025 billion worth of bonds. "Subsequent auctions will be held every business day from 13:15 to 14:45 (GMT) through October 14."
As a result of Wednesday's intervention to buy bonds by the Bank of England, the yields of European and US government bonds fell sharply. Yields on 10-year U.S. Treasury fell from 4.01% to 3.73%, rolling back from multi-year highs by 7.5%.
Against the backdrop of falling yields on US government bonds, the dollar fell sharply on Wednesday. Its DXY index lost more than 1%, dropping from an earlier new local 20-year high of 114.74 to 112.50.
Today, the markets are gradually calming down and "recovering" after yesterday's storm. The dollar, as we noted above, is recovering its positions, and its DXY index is near 113.25 as of this writing, while 10-year US Treasury yields is also growing again, which, in turn, is facilitated by the tough policy of the Federal Reserve.
Atlanta Fed President Raphael Bostic said yesterday that the base case for now is a 75 bps rate hike in November and a 50 bps hike in December. In his opinion, the lack of progress in curbing inflation means that by the end of the year, the Fed will have to set rates in the range 4.25%–4.5%.
The Fed's super-tight monetary policy cycle is an undeniably strong positive fundamental factor for the dollar.
As for the pound, the new policy announced yesterday by the Bank of England on the purchase of government bonds is "mixed" news for it, economists say. By buying bonds, the BoE actually suspended the planned quantitative tightening (QT). As you know, interest rate cuts and quantitative easing (purchases on the government bond market) are one of the main instruments of the central banks' monetary policy, as a result of which the quotes of the national currency, as a rule, are declining.
Given yesterday's sharp rise in government bonds, the fall in dollar quotes and the fact that the Bank of England intends to conduct large-scale purchases of government bonds daily until October 14, regular bursts of volatility in financial markets are likely during the time period announced by the BoE (from 13:15 to 14:45 GMT ).
Today also (at the beginning of the American trading session), the U.S. Bureau of Economic Analysis will publish the final data on GDP growth for the 2nd quarter, and the U.S. Department of Labor will present the data on weekly jobless claims. This will also affect the dollar quotes and cause volatility in the market, especially if the data differs greatly from the forecast values.
As of writing, the GBP/USD pair is trading near 1.0863, remaining in the zone of both short-term (below resistance levels 1.0998, 1.1438) and long-term (below resistance levels 1.2165, 1.2380) bear markets.
