Bank of England Holds Key Rate Steady as Economy Moves into Uncertain Territory
Thursday, August 5, 2010
, Posted by Usman Ali Minhas at 10:48 AM
On Thursday the Bank of England policymakers voted to leave its benchmark interest rate at the historically low 0.5%. This move was expected because BoE officials are still unsure what the effect the newly implemented austerity measures will have on the economy. Furthermore, there is still uncertainty over what the upcoming new taxes will have on economic growth. Some investors feel the central bank will have to remain flexible with its monetary policy in case the developing economic recovery stalls.
Lately the British Pound has been trending higher, reaching a major retracement zone. Most of this move has been driven by speculators looking for improvements in the U.K. economy while the U.S. economy falters. The recent Second Quarter GDP Report was better than expected; leading some investors to believe the economy is on the road to recovery. Skeptics cite the fact that this reading took place before the austerity measures were implemented.
High inflation has also had investors worried. One of the challenges for the Bank of England will be controlling inflation without stifling growth. Uncertainty over how the BoE intends to do this may limit gains and could begin to put pressure on the Sterling.
Technically, the British Pound found resistance at a key .618 retracement level earlier this week at 1.5967. Holding this level could trigger the start of a break back to 1.5635. Overnight the Sterling traded below 1.5884, putting this currency lower for the week. The market bottomed early in the trading session and put in a short-term top shortly after the central bank announcement.
Although the Pound is trading higher shortly before the New York opening, gains could be limited as traders stand aside ahead of tomorrow’s U.S. Non-Farm Payrolls Report. This report will offer more insight into the state of the economy and influence the Fed’s monetary policy decision at next week’s FOMC meeting. There is speculation that the Fed will renew its quantitative easing program. This along with low interest rates could keep downside pressure on the Dollar.
