Daily December British Pound Pattern, Price & Time Analysis
The December British Pound is trading weaker this morning. An early morning release of the minutes of the most recent Bank of England’s policy meeting showed some monetary policy committee members leaning toward an increase in stimulus. The announcement triggered a break to a six-week low against the Dollar.
Technically the market is straddling the 61.8 percent retracement level of the 1.5179 to 1.6158 range at 1.5553. A break through this Fibonacci level could trigger an acceleration to the downside. On the upside, the 50 percent price is the new resistance. Because of the possibility of thin pre-holiday trading in the U.S., traders have to be careful not to get caught in a bear trap. In other words, avoid building too big of a short position at current price levels because of the chance of a late session short-covering rally.
This morning’s BoE minutes revealed that the MPC voted unanimously to keep its benchmark interest rate at a record low 0.5 percent and hold its target for quantitative easing at 275 billion pounds ($428 billion). Further analysis revealed a very dovish tone as some voting members preferred to accelerate quantitative easing to stimulate economic growth.
Speeding up QE at this time is not likely since the existing program is still in the process of purchasing assets. The BoE has to take into consideration market capacity. Trying to expedite the existing program that is likely to take three months to complete will probably not be attempted.
Although a fresh stimulus effort is not expected over the short-run, the BoE left open the possibility that another round could occur perhaps early next year. Because inflation is expected to decline, the central bank said “The balance of risks to inflation meant that a further expansion of the asset-purchase program might well become warranted in due course”. If you recall, last week the BoE cut its growth and inflation forecast. Since the official forecast calls for inflation to slow below its 2 percent target in two years, an increase in stimulus may be warranted over time.
In addition, the European debt crisis is also weighing on the U.K. economy. It seemed to be on its way to recovery throughout 2010 and into early 2011, but the recovery began to stall once it became clear that the Euro Zone debt issues would create a tough economic situation.
The fundamentals suggest a long, drawn out downtrend is likely as long as economic stimulus remains the main option of the central bank. More stimulus remains a real option as growth and inflation are expected to continue to decline. As long as the Euro crisis continues to threaten to expand beyond Italy and Spain, look for the U.K. economy to remain stagnant-to-weaker. Technically, oversold conditions may slow down the rate of descent, but it is not likely to trigger a change in trend.
