Bank of England inflation report tempers GBP/USD bulls but for how long?

It has been a volatile morning for sterling. This is not to be unexpected as within the space of an hour there were two key reports released. The unemployment data at 0930BST was followed at 1030BST with the Bankd of England Quarterly Inflation Report. Both have had conflicting imapcts on the price of GBP/USD, in effect one, neutralising the other. The jump in sterling on the announcement of higher than expected wage growth has been tempered by the Bank of England cutting its 2015 forecasts for inflation and growth. However, I expect that any weakness in Cable on the back of the Bank of England inflation report will be used as a buying opportunity.


In the space of 15 minutes after it was revealed that average weekly earnings had improved to 2.2% (the highest since June 2011), Cable had rallied over 60 pips. However, this move was entrely retraced by the inflation report which contained a slightly reduced expectation on growth. The BoE cut its expectation for GDP growth in 2015 to 2.5% from 2.9% in the February report, citing the weaker than expected household consumption. The BoE also warned of the strong impact of sterling on the outlook for interest rates.The Bank of England expects CPI to to be 1.6% in 2015.


However, one of the big concerns with the strength of the UK economic recovery has for a while been the lack of productivity growth. Tha Bank of England has also downgraded its expectations of productivity growth for both 2015 (from 0.75% down to 0.25%) and 2016 (from 1.5% to 1.25%) to the yellow diamonds (from the green diamonds at the time of the February report).


Added to the cut in forecasts for inflation and growth, and this has impacted on the market’s expectation of the first rate hike. Short Sterling Interest Rate futures are pricing in a first rate cut well into Q1 2016 now. This is being priced into GBP/USD today.


What could this now mean for sterling? Cable has reversed since the report and is trading around 20 pips lower on the day (around 90 pips lower than before the report was released). I see this ultimately as a chance to buy. There may now be a slight drift backwards in the near term from thei report. However, the BoE expects the weak first reading of Q1 GDP to be revised higher from 0.3% (on look at the strong recent PMIs would suggest that this is likely to be true) and I do not see this to be the end of the good economic news from the UK.

Technically I see disps on Cable to now be seen as a chance to buy. The breakout abvoe the resistance at $1.5550 completed a strong base pattern and I see the support band between $1.5500/$1.5600 as an opportunity for a buying opportunity for further gains on sterling. I will be waiting for a buy signal before then going long. I see further upside still in this bull run.

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