After a six-day selloff, the British Pound is finally attracting buyers. Fundamentally this market has been getting beat-up since June 30th when an economic report showed that the U.K. economy had its worst quarter since 1958. Since then there have been signs that the economy is improving. The service sector is beginning to show growth, housing prices have stabilized and inflation is running ahead of the Bank of England's target.
Despite these small signs of recovery, the Bank of England announced early this morning that it had decided to leave interest rates at their historically low level of 50 basis points.
This news came as no surprise since investors do not expect the BoE to touch interest rates until it is absolutely sure that the U.K. economy is well on its way to recovery. Although these are small signs of a recovery, credit issues still exist with lending to businesses well down from recent peaks. Mortgage approvals are also down which is a common problem around the world.
Interest rates may not be an issue at this time, but rumors that the Bank of England would increase the level of funds available for quantitative easing helped trigger a sharp selloff in this market since Sunday night. Quantitative easing, which is essentially the printing of money, is an economic program in which the central bank buys government assets. It is a very dangerous maneuver because it can lead to an inflationary environment which will lead to a debasing of the economy.
The GBP USD surged to the upside following the news that the Bank of England would refrain from increasing the amount of funds available for the purchase of government assets. This came as a surprise to traders who had factored in an increase in the amount of funds available for quantitative easing.
Technically, the British Pound is in a down trend, however it may be short-term oversold. This means that this market may retrace 50% of its recent break back to 1.6362 to 1.6452.
At this time the current up move looks like a simple counter-trend retracement. This means that this market is likely to attract sellers on the first test of the retracement zone at 1.6362 to 1.6452. Traders will have to watch this market carefully while this zone is being tested to determine if new shorts start to build positions.
It may take a couple of days to determine whether this market is going to resume the uptrend or start a serious retracement to the downside.
Please do not hesitate to contact us at 1-800-971-2440, with any questions.
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