Will Pound Bounce Despite King's Wishes?

Last updated 11/11/2009 6:13 AM ET (GMT -5) 0 Comments - Add your comment

Boris Schlossberg

Director of Currency Research, GFT

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Cable tumbled more than 150 points in the aftermath of the BOE quarterly inflation report and press conference comments from BOE Governor Mervyn King that noted recent weakness in sterling was a welcome sign for an export led rebound. Despite recent evidence of economic recovery the language of the quarterly inflation report remained unabashedly dovish leaving the door open for further QE measures if necessary.

The report stated, “Despite the recovery in economic growth, output is very unlikely to return to a level consistent with a continuation of its pre-crisis trend for a considerable period. That reflects in large part the substantial impact of the downturn on the supply capacity of the economy, but also the sustained weakness of demand relative to that capacity.

The strength of the recovery remains highly uncertain and depends on the opposing forces affecting the outlook. The Bank’s asset purchases have injected money into the economy, raising the prices of a range of assets and improving companies’ access to capital markets. Nevertheless, spending growth remains weak. “

The report and the concomitant press conference completely knee capped pound bulls who drove the currency higher in the aftermath of better than expected UK labor data earlier in the day. The trade in sterling now centers on the tug of war between clearly improving economic fundamentals and the unremittingly dovish monetary policy of the BOE as UK central bank takes a page from Fed’s playbook of taking down its own currency in order stimulate growth in the export sector. It appears that UK monetary officials are uncomfortable with the recent rise towards the 1.7000 level and want to cap the move for the time being.

If risk aversion flows accelerate into the North American session cable could test support at the 1.6500 level, but given the generally upbeat results on the labor front, any further declines should attract bargain hunters and the unit should find near term support if risk appetite returns. Despite BoE jawboning any further improvement in UK eco data will likely prevent any additional QE measures and that should prove supportive to the pound if the risk trade continues.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.