The GBP USD fell this morning after Bank of England Governor Mervyn King reported in his letter to Chancellor of the Exchequer George Osborne that inflation slowed to 5 percent from 5.2 percent in September. This figure was below the median estimate of 5.1 percent.
Although the figure showed a decline, it still exceeded the government’s 3 percent upper limit. This figure prompted the BoE Governor to warn that U.K. inflation would fall back ‘sharply” in the next six months and reach its target level by the end of 2012. Uncertainty about the state of the global economy was the cited as the primary reason for the lower forecast.
Each time the inflation rate exceeds the government’s 3 percent upper limit, BoE Governor King must write a letter of explanation to Osborne explaining what will be done to bring the inflation figure back into range. In today’s letter, King stated that it is “possible that inflation could fall back more sharply given the existing margin of spare capacity in the economy, the substantial risks around the global economic recovery and the implications of a further slowdown in the world economy for the United Kingdom.”
Osborne responded by saying that the threat to the U.K. economy by the Euro Zone crisis is “very serious”. Taking the statements by King and Osborne together, one has to believe that they both feel the Euro Zone crisis is expected to linger for a prolonged period of time.
Traders reacted to the inflation news by selling the British Pound against the Dollar. This drove the price into an uptrending Gann angle at 1.5831. A failure to hold this level will mean the market could continue to break into the 50 percent level of the 1.5271 to 1.6165 range at 1.5718. The trend is clearly down now that the swing bottom at 1.5876 has been broken with conviction. This also reaffirms the two main tops at 1.6130 and 1.6165.
On Wednesday, King will hold a press conference to discuss the inflation situation as well as the Bank of England’s current quantitative easing program. Traders will be reacting to how he responds to questions about the U.K. government austerity program and the affect of the Euro Zone crisis on the U.K. economy.
At issue will be how these events fit in with the BoE’s move to continue to apply quantitative easing to prevent another recession. There is no doubt based on trader reaction this morning that an economic slowdown along with projections of lower inflation will mean the BoE’s Monetary Policy Committee will have to consider implementing additional quantitative easing. The tone of Mr. King’s responses is likely to drive the market in a big way.