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British Pound Could Break Below 1.53 If BOE Quarterly Inflation Report Cites Deflation Risk

By Terri Belkas
11 November 2008 23:19 GMT

The British pound remains firmly within in a downtrend, and despite the correction higher we saw during the last days of October, it may only be a matter of time before GBP/USD breaks below the October 24 low of 1.5257. Dismal outlooks for the UK economy and interest rates are likely to continue weighing the currency down, as Credit Suisse overnight index swaps are fully pricing in a 25 basis point rate cut by the Bank of England in December and 71.9 basis points worth of cuts over the next 12 months. Part of the reason for this is the weak status of the UK housing sector, as evidenced most recently by the 5.1 percent drop in the DCLG house price index in September from a year earlier. Indeed, the index reading was the lowest since record-keeping began in 2003 and given the persistent tightness of the credit markets, more stringent lending standards, and rising unemployment, things are likely to get worse. Upcoming economic data on Wednesday could highlight this as jobless claims in the UK are anticipated to rise for the ninth consecutive month in October by 40K, the largest single-month gain since 1992. While this could impact the British pound upon release at 4:30 ET, the announcement of the Bank of England’s Quarterly Inflation Report at 5:30 ET may be more important. Given the BOE’s latest policy statement following their aggressive 150 basis point rate cut, it appears that the Monetary Policy Committee is now more concerned about the potential for deflation, and if the Inflation Report confirms this outlook, the news could trigger a large British pound sell-off.

Related Article: British Pound Could Tumble If BOE Confirms Deflation Is a Concern

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11 November 2008 23:19 GMT