GBP/USD Rally on Optimistic BOE Inflation Report

Talking Points:

• BOE Quarterly Inflation Report appear more hawkish than dovish
• Carney hint next step is for rate increase
• BOE 2015 inflation forecast reduced from 1.4% to 0.5%

The Bank of England (BOE) published its Quarterly Inflation Report today at 10:30 GMT, presented by its Governor Mark Carney. In response to a more hawkish than anticipated tone communicated by Carney, the Pound popped straight through the session high of 1.5270 against the US Dollar to 1.5292. The market sees continued pressure on GBPUSD to drift upward and already above the daily S2 at 1.5330.

The BOE revealed today that it sees UK inflation to be above its 2% goal at the end of a 3-year horizon, whilst raising the 2016 and 2017 GDP growth forecast to 2.9% and 2.7% respectively. Carney expressed optimism in the UK economy, referring to “strong underlying dynamics” and pick-up in wage growth as well as unit labor cost. Furthermore, Carney sees slack to be eliminated by the middle of the forecast period, and hints for the next step in BOE monetary policy to “most likely” be a rate increase. Undercutting the optimism of the report, however, was the fact that 2015 inflation forecast was cut from 1.4% to just 0.5% by the central bank, siting weak inflation mostly due to oil and food costs. The BOE prepared the market for more downside risk to come, suggesting that inflation rate could drop below zero in coming months.

Recent risk events have contributed to a greater degree of volatility to persist within forex markets. Hours ago, the market saw more than 150 pips dip in the USDJPY and a run on bullish USD sentiment within the span of 10 minutes, as a reaction to the statement from the Band of Japan expressing “extra stimulus being counterproductive for now”. With Greek’s loan negotiations and its position within the Eurozone still under great uncertainty, tomorrow’s German GDP figures at 07:00 GMT will see a potentially sizable move on the Euro and its major peers including the US Dollar and the Pound Sterling.

GBP/USD (5 Min Chart) - Created using Marketscope 2.0

EUR/GBP (5 Min Chart)

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Written by George Meng, any comments, suggestions, or feedback please email instructor@dailyfx.com