The BoE inflation report revealed slowing inflation and a dovish tone as this concern is put to the side with the Eurozone crisis taking center stage.
- inflation still above 2.0% annual target rate, but is easing; y/y rate went from 5.2% in Sept. 2011 to 4.2% in Dec. 2011, and expected to come down further in 2012.
- no prospect of interest rate hike
- Mervyn King expects bumpy recovery
- King does not put away QE saying there’s no diminishing return but it will need some convincing to make it an appropriate option
- Sympathizes with the ECB’s tough task in trying to keep things
- Warns that exposure to European financial system puts the UK in harms way if Greece were to exit for example, so contingency plans are being made.
BoE Inflation Report (May)
GBP/USD Daily Chart 5/16/2012 6:55 AM EDT
The GBP/USD was already breaking a key support area ahead of the BoE inflation report and Mervyn King’s press conference. The 1.5990-1.60 area was a rising trendline that goes back to January 2012. A break below now opens up 1.5780-1.58, and below that opens the 1.5650 area.
Technically, the bull run in 2012 has not deteriorated, but has taken the first step.
Fade a pullback? If there is a pullback, it should stay below the 1.6050 pivot. This may be a good level to monitor for selling again after the bearish breakout. With a stop say 1.6080 and a target of 1.59, an entry at 1.6030 for example presents a 130:50, or about 2.5:1 reward to risk trade. 1.59 is a conservative target. The 1.58 target gives a much higher reward to risk.
It should be noted that if a choppier correction comes, the next level to consider fading can be near 1.61 and the 1.6150/60 area. above that, the market has likely found support for a range between 1.63 and 1.5890.
Fan Yang CMT is a forex trader, analyst, educator and Chief Technical Strategist for FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.