Excessive volatility hit the GBP USD early this morning following the release of the Bank of England’s forecast for economic growth and inflation. In the report, the BoE warned that the U.K.’s economic recovery was just beginning and continuing strength during the recovery period remains “highly uncertain.”
Since the global financial crisis began, the BoE has at times been aggressive in fighting the recession while at other time drawing criticism for moving too slowly. Some of the actions applied by the BoE to stem the recession include cutting rates to historically low levels, increasing government spending and applying quantitative easing which is in effect the printing of money. While all of these actions are considered positive, a lower Pound is also necessary to help drive up demand for U.K. exports and set the economy on the road to recovery.
The U.S. Dollar hit a 15-month low against a basket of currencies last night on the prospect that the Fed will keep interest rates at low levels for a prolonged period of time. This assumption is based on last week’s Fed FOMC statement and recent comments from a Fed official suggesting that unemployment is the major concern. This serves as a hint that the Fed is not likely to begin hiking rates until the U.S. jobs begin to show a recovery. The Dollar is trading weaker on this news versus all major currencies except the Japanese Yen and British Pound.
In other news, China announced a major departure in how it determines the value of its currency – the Yuan. In a statement on Wednesday, China said it will consider using the valuations of major currencies in guiding the price of the Yuan. This statement suggests that China will begin to move away from using the Dollar as a peg. This practice has been followed since the middle of 2008.
This proposed action by the People’s Bank of China is the first attempt to revalue the Yuan since currency reforms were put in place in July 2005. At that time, China said it would keep the Yuan “basically stable at a reasonable and balanced level.” In today’s statement, China said “… we will improve the Yuan exchange rate information mechanism.”
China’s factory growth output soared to a 19th-month high in October. This was a sign that financial stimulus helped improve the domestic economy. A drop in imports and exports indicated that the economy is still suffering from the global economic recession. This drop in imports and exports may have a major effect on its trading partners but most of all on Australia and New Zealand. This news is contributing to the weakness in the AUD USD this morning.
Higher equity, crude oil and gold prices are helping to pressure the USD CAD. The charts indicate that the first and second downside objectives were reached last night at 1.0522 and 1.0446. Further weakness should take this market to uptrending Gann angle support at 1.0395.
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