The British Pound erased early session losses and is now expected to open better in New York following the release of the Bank of England minutes which showed that the Monetary Policy Committee voted 8 -1 to keep interest rates at historically low levels.
Besides voting to keep rates low, the BoE also voted to maintain its asset-purchase program at 200 billion pounds. The MPC discussed both easing and tightening at its latest meeting before voting overwhelmingly to maintain the status quo.
Inflation is the key matter being discussed in the U.K. at this time, but MPC members found the time to talk about concerns over tight credit conditions, the impact of the government’s proposed budget measures on economic activity, and weaker business surveys that pointed to slowing output growth.
Regarding inflation, the BoE said “the weight of evidence continued to suggest that the margin of spare capacity was likely to bear down on inflation and bring it back to target in the medium term once the impact of temporary factors had worn off.”
The lone dissenter, Andrew Sentance, argued that rates should go up 25 basis points because inflation risks were not temporary and actually was skewed to the upside.
It’s obvious where to the two differ. The central bank sees high inflation as a temporary condition and Mr. Sentence believes it will remain a risk to the economy.
Sentence’s argument that inflation is not a temporary condition is based on the fact that inflation has been above the BoE’s 2% annual target in 41 out of the past 50 months and the government’s planned increase in value added taxes would mean that inflation would stay above target longer than the central bank had previously projected. With the vote to keep rates steady, 8 to 1, it is clear that the other member’s don’t buy his argument and truly believe that inflation will ease back below the 2% target by 2012 without any additional help from the central bank.
If there is truly enough spare capacity to drive inflation lower, then the BoE is likely to be right, but a sudden shift in demand could use up this excess, thereby driving up inflation or at least holding it steady, but above target. In my opinion, the BoE is predicting a slow down in consumer demand, and this cannot be good for the economy.
The inflation data released on Tuesday showed annual consumer inflation slowed to 3.1% in July from 3.2% in June. Although central bank officials acted surprised by the figure, BoE Governor Mervyn King issued a letter reiterating that spare capacity would eventually weigh on prices.
Technically the GBP USD has been trying to build a support base at the 50% price level of the 1.5123 to 1.5997 range at 1.5560. Last night this level was pierced but the market found buyers waiting at a long-term uptrending Gann angle at 1.5509 today. Tests of this angle have produced bottoms four times since the main bottom was formed at 1.4229 on May 20. Because of the strength demonstrated by this angle currently and in the past, one has to conclude that a break through this level will trigger a massive acceleration to the downside.
Shortly before the New York opening, the British Pound is trading higher and in a position to post a daily closing price reversal bottom. This formation suggests the possibility of a two to three day rally back at least 50% of the last swing down. This makes 1.5729 an upside target over the short-run.
