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The BoE Inflation report is much less hawkish than yesterday’s inflation letter – GBP/USD is free falling. The King deserves his crown. Update.

Yesterday,Mervyn King was forced to write a letter to the Chancellor of the Exchequer, to explain the fact that inflation is double the target rate. The letter included serious hints about two rate hikes in 2011, and this sent the pound all the way from the area of 1.60 to 1.6185, throughout the day’s trade.

But today is different – Claimant Count Change, an early indicator of British unemployment, showed a rise of over 2000 people instead of a fall. This was the first disappointment. The unemployment rate in December remained unchanged at 7.9%. Austerity measures are already felt in the fresh count change for January, but aren’t seen in December’s unemployment rate.

But the big move came from Mervyn King. The BoE inflation report, alongside his press conference already had a different tone.

While King mentioned upside risks once again, he also saw inflation falling below target on the long run. So, does he return to his stance about imported inflation and VAT related inflation?

GBP/USD is back down to 1.6080, and the move continues. Support is found at 1.60, followed by 1.5910 and 1.5840. Minor resistance is found at 1.6110. For more technical levels, see the GBP/USD forecast.

Further reading: Cable – it’s just a corrective pullback – Elliott Wave analysis for GBP/USD.