Sterling resumes recent rebound after BoE delivered a 50bps rate cut as markets expected. The bank left the door open for further policy easing as it noted a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate in the accompanying statement. BoE note that pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year. There is also need to increase the flow of lending to the non-financial sector. Though, recent depreciation of Sterling may help to moderate impact from global slowdown. Focus will turn to minutes to be released on Jan 21.
As mentioned before, markets already priced in the possibility of ZIRP and deepened recession in UK in the sharp down trend of Sterling in recent months. Short positions are being closed for profit taking as such expectation is gradually becoming facts. Meanwhile, Sterling is lifted in cross activities against Euro and anticipation that ECB is catching up with other central banks of the world for further policy easing.
EUR/GBP dives to as low as 0.8894 after BoE's announcement. Sustained break of 0.9 psychological support (with 50% retracement of 0.8234 to 0.9798 at 0.9016) argues that 0.9799 is indeed a medium term top and focus now turns to trend line support at 0.8758. Break will confirm that whole rally from 0.7963 has completed and will open up the case for deeper decline towards next important medium term support at 0.8234.