Pound drops despite BoE 8217 s concerns about inflation

In a unanimous vote, the Bank of England has left its monetary policy unchanged as had been widely expected. But the focus was always going to be on the Inflation Report and the minutes, and Mark Carney’s press conference. In the Inflation Report, there were a few surprises as the Bank said some of the monetary policy committee members had signalled increased concerns about inflation and that the stronger GDP made it harder to tolerate above-forecast CPI. Indeed some members were “a little closer” to their tolerance thresholds about rising levels of inflation. The Bank raised its GDP forecasts, most profoundly for 2017 – upping it to 2.0% from the 1.4% predicted in November. But it kept its inflation predictions broadly unchanged, though it did trim its outlook over 2 and 3 years horizons as increased labour market slack could weaken inflationary pressures.

The pound, which had been rising prior to the BoE’s Super Thursday, sold off. It was a classic case of “buy the rumour, sell the news” type of a reaction, although some would argue that the BoE sounded a little more dovish than expected. I, however, think the tone was not that dovish and there was a scope for it to bounce back now that Mark Carney has started to speak at his press conference.

The GBP/USD was testing support at 1.2580 at the time of this wring – the closing price level of Tuesday when it had formed a bullish engulfing candle. This level needs to hold as support on a daily closing basis otherwise the bias would turn bearish once again – at least in the short-term anyway. The next key support level is at 1.2415, a pivotal level in recent past. As before, I continue to expect higher levels for the cable going forward. The 1.2770/1.2800 range could be an interesting bullish objective to watch – should we get there.