DailyFX analysts correctly bet on the Pound at the end of April as it would appreciate over 800 pips over the past three weeks. Improving U.K. fundamental data, increasing risk appetite and signs that the BoE’s quantitative easing program was working all helped fuel bullish sentiment.
The BoE left their benchmark rate at 0.50% at their April policy meeting and forecasted that it would take two months to complete their bond repurchase program. Therefore, when signs started to develop that the program was working such as Libor falling to a record low optimism began to build. Improving fundamental data including a 0.3% gain in retail sales and both manufacturing and service PMI readings continuing to rise from record lows helped push sterling higher. The evidence that the recession was slowing in the U.K. was reinforced by similar data from the U.S. which helped fuel risk appetite and provided additional support for the GBP/USD. The central bank announcing another £50 billion of additional quantitative easing at their May meeting raised expectations of a faster recovery and sent the pound to its highest levels since January.
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What Has Changed?[/B]
The BoE’s quarterly inflation report painted a dour picture for the U.K. economy as it forecasted that inflation will fall below its 2% target and remain there until 2012. The central bank’s outlook is based on lending remaining tight leading to a protracted economic recovery. We are also seeing risk appetite start to wane as expectations are that labor markets will take considerable time to regain their footing which could push out a global recovery. As we see in the chart below the GBP/USD has tracked the Dow Jones Industrial Average and if see a pull back in equities the cable may follow. We have started to see sterling come under pressure which could be a sign that a top was put in place at 1.5354. Indeed, Dailyfx analysts have reversed their bias for the pound with 5 out of 8 choosing to short a sterling pair this week in their trade picks.
