This morning has seen the BOE’s Gov King send a strong message to the market that it will not be hiking interest rates as quickly as the market expects. Mervyn King even went as far as to say “that some people are getting ahead of themselves”. This short phrase has managed to wipe out almost all of yesterday’s gains in the gbp/usd pair, which had ended the trading session at USD1.6133 and is trading, at time of writing at USD1.6053, and as a result, causing sterling longs a great deal of pain. In this morning’s inflation report, the BOE raised its forecast for inflation in 2011 but also said that growth would be slower as “high commodity prices squeeze household incomes and government budget cuts start to bite”. The expectation is that inflation will fall below the 2% target from late 2012. This focus on the longer term outlook for inflation may prompt the market to reconsider the possibility of a double dip recession for the UK.
From a technical perspective it is perhaps the monthly chart which is the most interesting as the pair are currently sitting well below both the 100 and 200 period moving averages and trading in a relatively broad band between USD1.6300 to the upside and USD1.5400 to the downside. In addition, the resistance area created through much of 2009 presents a formidable barrier to any progress higher and coupled with the 200 average which currently sits in the USD1.6500 area which is about to be crossed by the 40 month average these factors to combine a longer term bearish picture for cable.