The GBP/USD is dropping like a rock today while the EUR/GBP soars following a dovish statement from BoE Governor King. King said the BoE is leaning towards decreasing the deposit rate it pays banks on reserves they park at the central bank. Such a decision would encourage banks to lend more and increase liquidity in the system. The continual dovish monetary stance of the BoE is punishing the Pound relative to other currencies. It seems the central bank is intent on pumping up liquidity despite this week's improvement in pricing. Today's CPI and RPI data beat expectations along with a strong rise in Input PPI last week. However, Governor King is not impressed, and it appears the BoE may even add onto the balance of its QE program at the next policy meeting. The last time King applied a monetary shock we received a stream of negative economic data from Britain, thereby justifying the BoE's action. Is King preparing us for another set of disappointing economic data? We will find out tomorrow since Britain will print its CCC data.
Meanwhile, gold and the EUR/USD are holding up relatively well despite the large pullback in the Cable. If the BoE continues to take measures devaluing the Pound, then we may begin to witness a more consistent divergence in correlation among the major currency crosses. In fact, King's intention may be to create an environment conductive of a weaker Pound in order to attract more global demand for Britain's services and manufactured goods. The central banks are clearly starting to make more individual judgements regarding their monetary policy after the banks acted in unison during the height of the economic downturn. We will monitor the behavior of the GBP/USD and EUR/GBP closely over the next 24-48 hours to see whether the dramatic divergence in performance abates following the psychological monetary shock issued by King. Investors should keep in mind the last monetary shock from the BoE resulted in an incessant leg down. Therefore, the GBP/USD could have more negative territory ahead of it in the near-term. However, the BoE didn't actually enact any policy, only implied the possibility of an event occurring. Therefore, the pullback might not be as dramatic as when the BoE surprisingly added onto its QE package.
Technically speaking, the pullback taking place in the Cable today is large and abrupt. The sharp reversal in the GBP/USD is accompanied by a shot of sell-side volume. Therefore, there is obviously weight behind today's movement. The currency pair has dropped beneath the psychological 1.65 level and 9/9 lows, both negative technical developments. The next question will be whether the GBP/USD can hold onto the bottom of the 8/19-8/24 trading range along with our 2nd tier uptrend line. Ultimately, our new 1st tier uptrend line serves as the most important gauge in regards to the currency pair's near-term uptrend since it connects through September lows. However, our 1st tier uptrend line is still sitting far off in the distance. As for the topside, the GBP/USD must now deal with all three of our downtrend lines along with the psychological 1.65 level. A positive development today would be for the Cable to close above 1.65 and our 2nd tier uptrend line. We are negative on the GBP/USD for the immediate-term due to the developments today regarding Britain's monetary policy.
Present Price: 1.6475
Resistances: 1.6495, 1.6524, 1.6551, 1.6570, 1.6595, 1.6622
Supports: 1.6455, 1.6431, 1.6402, 1.6388, 1.6366