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Bank of England Refrains from Raising Interest Rates and Its Asset Purchase Target in February

Bank of England Refrains from Raising Interest Rates and Its Asset Purchase Target in February

2011-02-10 12:40:00
Michael Wright, Currency Analyst
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The Bank of England held its key overnight lending rate and asset purchase target at 0.50 percent and 200 billion pounds in February as widely expected. There was a lackluster reaction in the British pound subsequent to the release as no change in policy was priced in. Going forward, currency traders will shift their focus to the BoE minutes which will be released on February 23rd. At last month's meeting, policy makers Andrew Sentance and Martin Weale pushed for a rate hike of twenty five basis points due to the fact that inflation stands at 3.7 percent (highest since April 2010) and is expected to push higher on the back of the increase in value added taxes. On the other hand, Adam Posen pushed for an increase in the bank's asset purchase target as economic activity is predicted to come under pressure in the medium term on the back of the government's most violent spending cuts since World War II. Therefore, as the split amongst committee members widen, traders should not rule out another shift by an MPC member.

Indeed, the U.K.'s interest rate at 0.50 percent marks the 23rd consecutive month that the MPC kept rates unchanged. Looking ahead, market participants will closely monitor the NIESR GDP estimate; however, the exact time has yet to be released. Meanwhile, consumer prices will be released next Tuesday. The report is of particular interest due to the fact that inflation remains stubbornly above the central bank’s target. As of late, economists are forecasting the annual rate to remain unchanged at 3.7 percent. In turn, a dismal release may lead the pair tumble lower, while a better than expected report will likely send the pound to a fresh yearly high.

GBPUSD Hourly chart

BoE_Refrains_from_Raising_Interest_Rates_and_Its_Asset_Purchase_Target_in_February_body_gbpusd.png, Bank of England Refrains from Raising Interest Rates and Its Asset Purchase Target in February

Source: FXCM’s Strategy Trader – Prepared by Michael Wright

Taking a look at the hourly chart, upside risks remain capped by 1.61, while there is key support at 1.6010. As technical studies begin to paint a bearish picture, traders should await a breakout in the pair for confirmation of direction. With risk aversion flowing back into the markets, while the “crowd” begins to bet on the dollar’s counterparts, I do not rule out a break to the downside. Therefore, I will look to enter a short position on a clear break and hourly close below 1.60.

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