This is going to be an important week for the British Pound. Let’s first start with the Bank of England (BoE) monetary policy statement.
The statement was short and unsurprising. The bank maintained its bank rate at 0.5% and its the stock of its asset purchase program at £375 billion. The more important event risk this week will be the quarterly inflation report to be released on Wednesday (5/13). We know inflation has been low in the UK. Annual CPI inflation was 0.0% in March, but it seems like the BoE is expecting this to be change as we progress through 2015 and into 2016. Some members however do not believe the inflation rate will be back to 2.0% even after 2016. We will have to check the temperature of the Monetary Policy Committee on Wednesday.
The market appears positive as well in terms of inflation expectation because it is buying up the sterling pound. Let’s take a look at the GBP/USD and EUR/GBP.
The GBP/USD rebounded from its low on the year at 1.4566 and appears to be in a bullish reversal. It is making another new high on the month today and is essentially at the high on the year. It looks poised to test the 1.5790 support resistance pivot. Let’s see if the inflation report will allow the pair to break through and extend the bullish correction at least towards 1.60. Part of the reason GBP/USD is rallying is because of the softer USD as of late. But the extension this week is mainly an anticipation from the market that the inflation report will show a more hawkish, or at least less dovish BoE; and that a rate cut will be off the table. Let’s take a quick look at the EUR/GBP as well.
The EUR/GBP had a bullish correction since March. It looks like it has completed an ABC correction and is ready for bearish continuation after retreating sharply since last week. If the inflation report is indeed optimistic, we can see EUR/GBP retest the 0.7014 low on the year with risk of extending lower in line with the prevailing downtrend.
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