British Pound Tumbles Despite BOE Decision To Leave Rates Steady -? Why?

Looking at the British pound versus the US dollar on Thursday, one would think the Bank of England had surprisingly cut rates.

However, this was not the case as the BOE left rates steady at 5.00 percent and did not issue a monetary policy statement, as expected. In fact, GBP/USD initially edged higher following the announcement, but it was a bout of US dollar strength following commentary by ECB President Trichet that really sparked the move. While we don’t have anything new to go on following the BOE meeting, overnight index swaps now show that the market anticipate 50bps worth of cuts within the next 12 months, and for good reason. While CPI remains well above the Monetary Policy Committee’s 2.0 percent target at 3.8 percent, business activity in the manufacturing, services, and construction sectors are all contracting, putting the UK economy at risk of recession. As a result, downside risks loom for the UK’s Bank Rate, and thus, the British pound. Nevertheless, with no UK data scheduled to be released on Friday, [B]GBP/USD may simply consolidate above trendline support at 1.9400 for now[/B], though a break below that level should target the March 2007 lows of 1.9185.