U.K. Budget Cuts May Force BoE to Stimulate Economy

The GBP USD is under pressure overnightfollowing a strong rise on Wednesday. The reversal of the previous day’s rallyis a sign that the action was most likely short-covering rather than newbuying.

The GBP USD is under pressure overnight following a strongrise on Wednesday. The reversal of the previous day’s rally is a sign that theaction was most likely short-covering rather than new buying. Traders werereacting to the Bank of England minutes which showed a three-way split as towhether the central bank should provide additional stimulus to the economy.

With the government starting another round of spending cuts,many traders feel the BoE will be forced to provide fresh quantitative easingto prevent a double-dip recession. Speculators pressured the Sterling overnight in anticipation of afurther easing of monetary policy. Additionally, an overnight report showed U.K. retailsales unexpectedly dropped in September for a second month, encouraging tradersto further explore the short side.

While this report pushes the central bank closer to printingmore money to help the economy, traders firmly believe that the next U.K.inflation report will be the final determinant as to when the BoE will beginanother round of quantitative easing and how much aid will be made available.

Technically, Wednesday’s rally stopped at 50% of the sharpbreak at 1.5878. This price level was based on the short-term range of 1.6106to 1.5650. Since the main trend turned down on the daily chart earlier in theweek, yesterday’s rally may have set up a secondary lower top.

If this is the case, then the next move is likely tocontinue down to 1.5701. An acceleration through this level could trigger aneven further break to an uptrending Gann angle at 1.5616 or the .618retracement level at 1.5605.