BoE Seen Keeping Rates As Is with Lack of Inflationary Pressure, GBPUSD Surges Higher

by on February 12, 2014 4:55 pm BST

The Sterling surged higher after the Bank of England (BoE) released their inflation report and signaled that the current benchmark rate of .5 percent will remain for another year. BoE Governor Mark Carney said that growth within the United Kingdom is expected to growth 3.4 percent in 2014, a .6 percent increase from the bank’s previous forecasts; but the recovery is “neither balanced or sustainable.” And the pound surging, just below, two-year highs could cause problems down the road.

Carney said that “activity is still below its pre-crisis level and the household saving rate is likely to fall further,” and that there are “headwinds” both home and abroad. Due to these headwinds, including lack of inflation, the BoE could keep rates where they are for some time into the future. The BoE monetary committee said rate would eventually go up to two or three percent, but remain lower than pre-crisis levels of five percent. “Raising bank rate gradually would guard against the risk that, after a prolonged period of exceptionally low interest rates, increases in Bank rate have a bigger impact than expected on output and spending.”

This morning’s inflation report, the central bank believes there is still spare capacity roughly 1-1.5 percent of national ouput. The BoE looks for this to be absorbed within the economy before rates rise.

The Sterling moves against the greenback by over 100 pips as it makes its way back to the two-year high of 1.6666. The GBPUSD found based resistance near 1.6450, and the pair has trending up ever since. Price action resistance is 1.6598, and a trend line ascending from the yearly low of 1.4812 could provide additional resistance. However, a break could send GBPUSD to retest the highs. Otherwise, expect a pullback 1.6510/15.

1D Chart of GBPUSD

1D Chart of GBPUSD