Fundamentals, Technicals Drive British Pound Higher

The British Pound strengthened this morning after the Bankof England said inflation may continue to accelerate above its 2 percenttarget, reducing the chances that the central bank will reignite asset purchases.

The British Pound strengthened this morning after the Bankof England said inflation may continue to accelerate above its 2 percenttarget, reducing the chances that the central bank will reignite asset purchases.

Overnight the BoE said its officials are having a “vigorousdebate” over the risks of inflation. In its inflation report, the central banksaid near-term inflation is expected to be higher than in August, and consumerprice growth above its target through 2011.

Bearish traders got spooked a little following the report,triggering a mild short-covering rally. While the report was enough toestablish support, buying wasn’t strong enough to mount a significant challengeagainst the recent top.

Based on this morning’s action, it looks as if the BoE’s“wait and see” monetary policy approach is not likely to change until thecentral bank gets a chance to assess further economic releases. After Tuesday’ssell-off, it looks as if this morning traders are only making positionadjustments to reflect the central bank’s attitude.

Technically, the GBP USD is trading higher after testing animportant 50% level at 1.5974. In addition, it held yesterday’s low at 1.5951.An uptrending Gann angle at 1.5950 forms a support cluster at 1.5951 to 1.5950.A failure to hold this zone is likely to trigger a break to the .618 level at1.5897.