ATFXThe emergency bond purchase by the Bank of England is about to end,GBPUSDLong term potential parity

9month28On the same day, the Bank of England announced the launch of an emergency bond purchase program, without setting a limit on the size of bond purchases, and the scale of purchases made on that day was10.25Billion pounds of Britain20Long term treasury bond with a maturity of years or more.11On the same day, Bank of England Governor Bailey said in a speech: Our intervention is temporary and will not be extended. Financial markets, related funds, and all companies only have three days to prepare for the worst. This means that the Bank of England will end its bond buying program this week. Influenced by this news, the yield of British 10-year treasury bond bonds rose to4.464%, from the high point of the year4.504Just one step away. The bond market is the pricing anchor of the exchange rate market.GBPUSDThis week's decline1.08%, lowest touch1.0925. Considering thatGBPUSDThe medium to long term trend is a significant bearish trend, and the pound is highly likely to follow in the footsteps of the euro and establish an exchange rate with the US dollar1:1The situation.

The recent actions of the UK government and the Bank of England are completely opposite to the goal of "curbing high inflation". The first economic policy after the new Prime Minister Truss took office was to reduce taxes on a large scale. Although it helped to reduce the tax burden on the people and enterprises, it was only suitable for implementation when inflation was low, while tax reduction in the environment of high inflation was tantamount to adding fuel to the fire. In addition, the reduction of British government tax revenue is bound to increase the amount of treasury bond, which will exacerbate the downward trend of treasury bond prices. The Bank of England's aggressive interest rate hikes and emergency bond purchases should not have occurred at the same time. Under the chaotic policies, the market's confidence in British bonds, the pound, and the British stock market is gradually diminishing.

External unfavorable factors cannot be ignored either. Although the Russia-Ukraine conflict did not directly affect the euro area and the United Kingdom, the two countries are slowly weakening their economic potential due to their various aid to Ukraine and various sanctions against Russia. The best way for Europe to purchase oil and gas is through imports from Russia, but now due to international relations issues, Europe has to import oil and gas from North Africa and the Middle East. On the one hand, this increases transportation costs, and on the other hand, the total supply cannot meet the huge demand. More seriously, both of these energy products are closely related to people's daily lives: fuel is needed for travel, and cooking is essential/Heating requires natural gas. If the problems of high oil and natural gas prices continue, the government support rates of European countries may fall into a trough.

The Federal Reserve's aggressive interest rate hike policy is attracting global funds to the United States. In the past year, all non US currencies have been depreciating against the US dollar, and the depreciation of the Japanese yen is even about to touch30%Although the depreciation of the local currency is beneficial for boosting export industries, the prices of imported goods will experience a significant increase. Most European countries are in a trade deficit, with the total amount of imported goods far exceeding the total amount of exports. In the situation where various daily necessities rely on imports, a continuously depreciating local currency will significantly reduce the cost of living for residents.

ATFXBrief view of the analyst team: the Russia-Ukraine conflict is expected to last until2023In the year, there is no sign of slowing down the Federal Reserve's interest rate hike policy. The eurozone wants to curb high inflation while also maintaining liquidity in the bond market, but the ultimate result is frequent mistakes. With the loss of confidence in the financial market, in the long run,GBPUSDExpected to fall to the parity line.

*Risk Tips and Disclaimers*
There are risks in the market and investment should be cautious. The above contents only represent the views of analysts and do not constitute any operational recommendations.
2022-10-12