The Pound came under pressure overnight following testimony by Bank of England Governor Mervyn King in which he said the UK economy faces a new threat: the risk of a weaker-than-expected recovery in the Euro-zone. The BOE had factored in higher exports and an increase in net trade as domestic demand faltered, mainly on the back of a weaker Pound. However those gains have not materialized, though King expected then to “in due course.”

One problem is that, according to King, the Euro-zone recovery “appears to have stalled” and with the Euro-zone being UK’s main trading partner it will have an effect on the UK recovery. King did not rule out the BOE restarting its quantitative easing policy, which it suspended earlier this month, having bought £200B of assets with freshly created central-bank money. He did caution thought that the impact of the existing purchases has yet to help the economy.

On the inflation front, King said the BOE does not want to risk a rise in public inflation expectations, so the bank would tighten policy if inflation in the medium term were to the upside of its 2.0% target.

Traders will now see if the economic outlook turns weaker than expected, and if inflation pressures lower than there will be a chance of further quantitative easing and a further slide in the value of the Pound.

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In a look at the GBP/USD, we can see that the pair broke below an important level at 1.5575, which had been acting as support during a period of consolidation from Feb. 5th to Feb 18th. However, We broked through that level as the US Fed raised its discount rate by 25 basis points. Following that break of support the pair hit a low near 1.5350 and overnight retested that 1.5575 level as resistance. King’s comments coincided with that test and in the wake of the news that the BOE sees the chance of further QE as well as increased headwinds from a stalled recovery in its main trading partner, the pair fell to an intra-day low just below 1.54.