Mervyn King continues to dominate the Pound’s agenda, and not in a positive way. His big hints about more QE pound the pound as it makes another attempt to break the support line.
The governor of the Bank of England, Mervyn King, hurt the Pound once again. In his appearance in parliament, the agenda was inflation – the quarterly Inflation Report Hearings. But these aren’t the headlines that King produced.
Together with his colleagues from the central bank, he began by saying that economy is still fragile, already a weak start. Concerning the official agenda, inflation, he continued to shrug it.
What about the Quantitative Easing program? This program, officially called the Asset Purchase Facility, means that the bank buys bonds to increase liquidity, and practically spills pounds, devaluing the currency.
The program was expanded up to 200 billion pounds, and the money recently ran out. In the recent decision, there was no additional allocation of money to the program. End of story?
No. Mervyn King and his colleague David Miles said in parliament that “there’s a strong case to expand the program if the economy is weaker”. Although there is an “if”, the fact that these policymakers didn’t rule it out means that it sure is possible, and that bad for the Pound.
Before we see the reaction, it’s important to notice their specific words about the currency. Deputy governor Charles Bean said (emphasis mine):
“I expect to see the economy gradually pick up steam through this year, reflecting: the substantial stimulus from policy, much of which is still working through; the lower level of sterling, which should gradually boost exports and discourage imports;
So, a low sterling is good for the economy and is something the bank wants. The punch comes from King himself, which wraps everything together. When asked about the QE program, he mentions the Pound:
“Despite the depreciation of sterling we haven’t so far seen much evidence of a pickup in net trade in the UK, which is an important part of our rebalancing. “This is a decision we look at month by month.”
Although this wording is very indirect, we can understand that King wants a weaker British Pound, and doesn’t hesitate to wave the gun of more Quantitative Easing.
Forex market reaction and technical levels
GBP/USD fell from 1.5548 to 1.5393 in reaction to this event. Over 150 pips. This was a strong reaction that stopped the Pound from climbing to last week’s trading range, which peaked above 1.58.
It wasn’t strong enough to push the Pound over the cliff. GBP/USD kept a safe distance. The important line is 1.5350, a historical peak and a bottom tested recently. This is the key level.
If the Pound recovers from the King’s blow, the initial and minor resistance line appears at 1.5520. Above that, 1.5770 supplies stronger support. 1.5833 is an important resistance line, but it’s too far now.
GBP/USD Forecast – More moving events on the road.
There are more important events this week. King American counterpart, Ben Bernanke, will also appear before a committee in Washington and will also have his share of moving the markets.
Regarding the Pound, there’s a major release on Friday – British GDP. As King said, the recovery is fragile – only 0.1% growth in Q4. Will this be revised to the downside? We’ll wait and see…
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