The British Pound (GBP) appears to have broken out of a nasty downtrend which had seen world markets tank as the US dollar strengthened. Problems in the Euro zone with their debt crisis increased fears in the marketplace which went into risk aversion mode. “Operation Twist” by the US Fed also helped increase short-term demand for the US dollar which weighed on the Pound as well.
But now that there is seeming light at the end of the tunnel for Greece and the Euro debt crisis, markets have flipped to risk-taking mode and are looking to take back some of the last weeks’ losses. The Pound is poised to receive the benefit of some of that risk appetite despite the economic environment in the UK.
The economy there has seemingly defied Central bankers and Finance officials who have seemingly been wrong for the past two years. Inflation increased in the UK and the BOE’s belief that it would subside has not happened yet they haven’t done anything to combat inflation through rate hike increases citing a weak economy.
Now they are saying that the economy is seriously slowing down which could require further monetary easing, though the numbers just aren’t as bad as they would need to see. If the Euro debt crisis is partially responsible for the decline in the growth of the global economy, then it stands to reason that if a solution can be found, economies will be able to grow again.
This seems to be the case in the UK, and so far the BOE lack of tinkering but increased rhetoric means that they likely won’t do anything next time around either. Thus I think we could see a near-term move of GBP/USD back to 1.58, with a move back to 1.60 if we get more clarity from the Euro zone.