The British pound plummeted below 1.50 versus the US dollar for the first time since 2002 on Wednesday following the Bank of England's quarterly Inflation Report, in which they revised both their growth and inflation forecasts significantly lower.
The BOE’s forecasts predict that the UK economy will contract through 2009 and CPI will fall “well below” the government's 2 percent target and could even fall negative, signaling deflation, unless it cuts rates further. Subsequently, Credit Suisse overnight index swaps have shifted to almost fully price in a 50bp rate cut by the BOE during their next meeting on December 4, but this could shift even further in coming weeks as BOE Governor Mervyn King said that interest rates could fall much lower from current levels, and declined to rule out cutting rates to zero. GBP/USD ended the day by consolidating above 1.49, but with lingering risk aversion and bearish interest rate expectations unlikely to fade anytime soon, the pair could easily break below this level. The next major region of support looms at 1.4680/1.4700.
Related Article: British Pound Could Tumble If BOE Confirms Deflation Is a Concern
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