BoE Inflation Report Unexpectedly Hawkish
The BoE inflation report led to a significant Sterling rally accross the board due Hawkish comments stating that consumer prices are around target in the medium term. The report went on to say that there was a high probability that the BoE Chancellor Mervyn King would have to write an inflation letter to the Chancellor of the Exchequor. The BoE stated that the economic recovery will continue healthily onwards into 2011 with Inflation remaining over target probably throughout 2010.
Economists will now argue whether inflation could become a problem due to the QE used in the past and potential QE required for the future, to stimulate the economic recovery. Any inflation problems will have to be tackled with interest rate rises and you could therefore argue that Sterling’s rally could be down to an increased chance of sooner than expected rises to interest rates.
Investors have started to scale back expectations for more QE in 2011 as a result of the hawkish comments. The GBP/USD holds above the 20 day moving average and still remains in an uptrend. However a sharp correction in FX options sentiment suggests that a key reversal could still be on the cards. It is difficult not to recognise the speed at which FX options traders are covering their positions or hedging against an ongoing strengthening of the USD in the next few days. The trend could easily continue into tomorrow with a US market holiday and the absence of any key economic data.
The Euro has come under pressure in the last couple of days falling back under 1.40 and climbing so a 6 week high on the GBP/EUR pair in trade today. A key reversal has occured and the market is now expected to fall back towards support at 1.3350.
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