Bank of England Expects Inflation to Fall Below 2% Target

The British Pound erased early session losses and is nowexpected to open better in New York following the release of the Bank ofEngland minutes which showed that the Monetary Policy Committee voted 8 -1 tokeep interest rates at historically low levels.

The British Pound erased early session losses and is nowexpected to open better in New York following the release of the Bank ofEngland minutes which showed that the Monetary Policy Committee voted 8 -1 tokeep interest rates at historically low levels.

Besides voting to keep rates low, the BoE also voted tomaintain its asset-purchase program at 200 billion pounds. The MPC discussedboth easing and tightening at its latest meeting before voting overwhelminglyto maintain the status quo.

Inflation is the key matter being discussed in the U.K. at thistime, but MPC members found the time to talk about concerns over tight creditconditions, the impact of the government’s proposed budget measures on economicactivity, and weaker business surveys that pointed to slowing output growth.

Regarding inflation, the BoE said “the weight of evidencecontinued to suggest that the margin of spare capacity was likely to bear downon inflation and bring it back to target in the medium term once the impact oftemporary factors had worn off.”

The lone dissenter, Andrew Sentance, argued that ratesshould go up 25 basis points because inflation risks were not temporary andactually was skewed to the upside.

It’s obvious where to the two differ. The central bank seeshigh inflation as a temporary condition and Mr. Sentence believes it willremain a risk to the economy.

Sentence’s argument that inflation is not a temporarycondition is based on the fact that inflation has been above the BoE’s 2%annual target in 41 out of the past 50 months and the government’s plannedincrease in value added taxes would mean that inflation would stay above targetlonger than the central bank had previously projected. With the vote to keeprates steady, 8 to 1, it is clear that the other member’s don’t buy hisargument and truly believe that inflation will ease back below the 2% target by2012 without any additional help from the central bank.

If there is truly enough spare capacity to drive inflationlower, then the BoE is likely to be right, but a sudden shift in demand coulduse up this excess, thereby driving up inflation or at least holding it steady,but above target. In my opinion, the BoE is predicting a slow down in consumerdemand, and this cannot be good for the economy.

The inflation data released on Tuesday showed annualconsumer inflation slowed to 3.1% in July from 3.2% in June. Although centralbank officials acted surprised by the figure, BoE Governor Mervyn King issued aletter reiterating that spare capacity would eventually weigh on prices.

Technically the GBP USD has been trying to build a supportbase at the 50% price level of the 1.5123 to 1.5997 range at 1.5560. Last nightthis level was pierced but the market found buyers waiting at a long-termuptrending Gann angle at 1.5509 today. Tests of this angle have producedbottoms four times since the main bottom was formed at 1.4229 on May 20. Because of the strength demonstrated by this anglecurrently and in the past, one has to conclude that a break through this levelwill trigger a massive acceleration to the downside.

Shortly before the New York opening, the British Pound is trading higher andin a position to post a daily closing price reversal bottom. This formationsuggests the possibility of a two to three day rally back at least 50% of thelast swing down. This makes 1.5729 an upside target over the short-run.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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