What's Keeping the GBPUSD Down?


Remaining below resistance at 1.6000, and lower by 1.6% since hitting a peak at 1.6139, the British pound has continued to remain weaker against the US dollar.  Although technical factors are playing a pivotal role in the near term fate of the major currency, the Bank of England is playing a bigger role in keeping the bearish sentiment intact ahead of the upcoming retail sales report.

A Prelude

According to the inflation report released by the Bank of England this morning, inflation forecasts remain entrenched at the lower end ofthe central bank’s 2-3% target band. Central bankers are expecting a slightly above 2% rate for the year, with next year’s figures dipping below the target at 1.9%.  This is in contrast to yesterday’s measure that the UK experienced surging consumer price inflation of 2.7% annually.  If the current sentiment stands, it keeps the quantitative easing option on the table. Policymakers are more likely to ease monetary policy in a slow inflation environment.

And, they are considering it.

Following the admission that the UK economy remains in a“subdued recovery”, Bank of England Governor Mervyn King noted that the monetary committee hasn’t “concluded that there will be no more purchases.”  The comments increase speculation that the central bank will continue to view further asset purchases as a tool for future economic growth – which is anticipated to remain “sustained, but slow over the next three years.”

Conclusion

Ultimately, the specter of further asset purchases, which translate into additional debasement of the pound, is keeping any bullish advances at bay in the major currency. The sentiment will likely endure until the MPC’s next meeting December 6th and through tomorrow’s retail sales report. Expectations remain high that October retail sales volume slumped – anticipated to decline by 0.1% month over month.  A lower figure last month would lower the annualized pace to 1.6% and support the notion of additional asset purchases.

Technical Considerations

As a result, the technical outlook remains bearish for the near term, although further consolidation can be expected.  For the moment, GBPUSD is keeping to support at 1.5850.  Penetration lower would open scope for an immediate test at 1.5741 61.8% fib support.

GBPUSD Chart

Source:  FXTrek Intellicharts

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