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GBP/USD Extends Bearish Trend

Published 12/01/2016, 07:47 AM
Updated 05/14/2017, 06:45 AM

The Sterling Wallowed In The Defensive Track After The BOE Stress Test Result.

The British pound retreated at the mid-session on Wednesday after the result of the UK banking system stress test imposed by the Bank of England. The sterling wallowed on the defensive ground while the US dollar was pushed higher by the traders who are hopeful in the outcome of the OPEC meeting. In the hype of financial market volatility, emerging currencies found it hard to have a breather.

At the time of writing, the sterling lost 0.05 percent against the US currency. GBP/USD opened at 1.24926 with a session high of 1.24926 and a session low of 1.24855. The pair found resistance at 1.25034 and support at 1.24585.

Further fall through will result in a new support at 1.24585 while a breakthrough within the day will result in a new resistance at 1.25034.

The pair has been trading below its 20-day SMA of 1.24874 but it hasn’t broken in its 50-day SMA of 1.24469. On a technical side, after a high volatility comes a low volatility. Hence, there’s a reasonable chance for a tight trading range in the coming sessions. If the band continues to contract, GBP/USD may play around 1.2500 to 1.24700 levels in the following sessions.

The BOE has kept its bank rate at 0.25 percent as it struggles to meet the 2 percent inflation target. Therefore, the British currency couldn’t find any support from bank amid the financial uncertainties brought not only by the expected Fed rate hike in December, but also due to the impact left by the UK referendum. As the BOE finds ways to sustain growth and employment, its monetary rates will remain- resulting in a probable bullish momentum for the sterling.

Meanwhile, the Royal Bank of Scotland (RBS) failed to pass the BOE’s stress test. The regular stress test of the UK banking system was recommended by the Bank’s Financial Policy Committee (FPC) to assess the capital adequacy of the system. The committee keeps the UK countercyclical capital buffer rate at 0% and restated its intention to maintain the rate until at least June 2017.

RBS Chief Financial Officer Ewen Stevenson expressed the commitment of the bank to create a stronger, simpler and safer bank for their respective customers and shareholders after the conclusion of the test. “We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank's stress resilience including resolving outstanding legacy issues.”

After the result of the test, the FPC indicated that as a consequence of the stress test, the banking system is in aggregate capitalized to support the real economy in a severe, broad and synchronized stress scenario.

On the other hand, the Prudential (LON:PRU) Regulation Authority (PRA) Board concluded capital inadequacies for three banks, which comprised not only The Royal Bank of Scotland Group (LON:RBS) but also Barclays (LON:BARC) and Standard Chartered (LON:STAN).

The PRA Board judged that:

• The test did not reveal capital inadequacies for four out of the seven participating banks, based on their balance sheets at end-2015 (HSBC, Lloyds Banking Group (LON:LLOY), Nationwide Building Society and Santander (MC:SAN) UK).

• The Royal Bank of Scotland Group (RBS) did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate. Based on RBS’s own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA Board.The PRA will continue to monitor RBS’s progress against its revised capital plan.

• Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had
already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan. While these steps are being executed, its AT1 capital provides some additional resilience to very severe shocks.

• Standard Chartered met all of its hurdle rates and systemic reference points in this scenario. However, it did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position. (source: http://www.bankofengland.co.uk/financialstability/Documents/fpc/results301116.pdf)

The financial stability of the entire nation and the steadiness of the political structure typically showcase growth of the economy. In times of sustainable growth, the central bank may consider to increase rates, which may result in currency appreciation. However, this is not the case yet for the British pound.

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