GBP/USD – Pound Slumps As BOE Inflation Report Disappoints

The British pound lost ground against the US dollar after the Bank of England said that the inflation target would not be met before 2016. GBP/USD dropped sharply on the news, losing over a cent in Wednesday trading. The pair crashed below the 1.56 line, and has leveled off in the mid-1.55 range. In the US, retail sales numbers showed very weak growth, which was what the markets expected.

The pound got a jolt as the BOE released its quarterly inflation report. The BOE stated that inflation was likely to surpass the 2% inflation target until mid-2016. The bank revised its inflation forecast for 2015, from 1.8% to 2.3%. The BOE added that it expected that the economy would experience a “slow but sustained recovery” for the next three years, and that it was ready to provide additional stimulus as needed. The markets were not impressed, and the pound sagged in response, shedding close to a cent in Wednesday trading. There is growing concern about the health of the UK economy, which contracted 0.3% in Q4 of 2012. The BOE was succinct in summarizing economic activity (or the lack thereof), over the past 12 months, calling it “broadly flat”.

In the US, the markets were pleasantly surprised as the Federal Budget Balance easily exceeded the estimate, and posted a surplus of $2.9 billion. The markets had anticipated a deficit of $4.6 billion. US Retail Sales and Core Retail Sales, both key indicators, posted very weak gains. Retail Sales rose 0.1%, matching the forecast. Core Retail Sales gave a similar performance, gaining just 0.2.%. The estimate stood at 0.1%. Analysts blamed the weak data on recent tax increases and higher gasoline prices. This could signal decreased consumer spending, which would be bad news for the fragile US recovery.

The G-20 finance ministers meet in Moscow later this week, and an important topic on the agenda will be the issue of exchange rates. There is mounting concern about “currency wars”, as countries are increasingly relying on monetary policy to kick-start their flagging economies. The Institute of International Finance, which is comprised of leading banks and financial institutions, has urged the G-20 to take steps to avoid the “possible discord on exchange rates”. The G-7 also weighed in on the matter, and reiterated its commitment to market-determined exchange rates. For example, Japan’s trading partners are alarmed by the sinking yen, but the Japanese government has been brushing off international criticism of its monetary policies. Japanese Finance Minister Taro Aso stated that the monetary easing measures are needed to deal with deflation and the government has not actively devalued the yen. Anyone expecting fireworks at the G-20 over currency manipulations is likely to be disappointed – given the need to reach a consensus, analysts expect any statement on currencies to be mild in nature.

GBP/USD for Wednesday, February 13, 2013

GBP/USD February 13 at 15:30 GMT

1.5560 H: 1.5689 L: 1.5534

GBP/USD Technical

The pound continues to lose ground, and has dropped into the 1.5560 range. line. The pair is facing weak resistance at 1.5568, and this line could face more activity today. The line of 1.5625 is stronger. On the downside, there is strong support at 1.5481. This line has held firm since July 2012. The next support level is at 1.5395.

Current range: 1.5481 to 1.5668.

Further levels in both directions:

• Below: 1.5481, 1.5395, 1.5309, 1.5203 and 1.5129.
• Above: 1.5568, 1.5625, 1.5685, 1.5728, 1.5785, 1.5850, 1.5919

OANDA Open Positions Ratios

The GBP/USD ratio continues to point to a shift towards long positions. We are seeing an opposite move in the currency pair, as the pound has taken it on the chin in Wednesday trading, posting sharp losses. Despite the pound’s struggles, trader sentiment remains strongly biased in favor of long positions, indicating an expectation that the pound will bounce back from the current downward trend.

The pound  showed some life on Tuesday, but any hopes of a sustained rally were dashed, and the dollar is again pummeling the struggling British currency. Will the downward swing continue? GBP/USD has shown a lot of volatility this week, and with the markets digesting a disappointing report from the BOE, we could see further fluctuations from the pair.

GBP/USD Fundamentals

• 2:00 US President Obama delivers State of the Union Address.
• 10:30 Bank of England Governor King Speaks.
• 10:30 Bank of England Inflation Report.
• 13:30 US Core Retail Sales. Estimate 0.1%. Actual 0.2%.
• 13:30 US Retail Sales. Estimate 0.1%. Acutal 0.1%.
• 13:30 US Import Prices. Estimate 0.8%. Actual 0.6%.
• 15:00 US Treasury Secretary Jack Lew Speaks.
• 15:00 US Business Inventories. Estimate 0.3%. Actual 0.1%.
• 15:30 US Crude Oil Inventories. Estimate 2.4M. Actual 0.6M.
• 16:10 US FOMC Member James Bullard Speaks.
• 18:00 US 10-year Bond Auction.

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.