Bank of England Holds Key Rate Steady as Economy Moves into Uncertain Territory

On Thursday the Bank of England policymakersvoted to leave its benchmark interest rate at the historically low 0.5%.

On Thursday the Bank of England policymakers voted to leaveits benchmark interest rate at the historically low 0.5%. This move wasexpected because BoE officials are still unsure what the effect the newlyimplemented austerity measures will have on the economy. Furthermore, there isstill uncertainty over what the upcoming new taxes will have on economicgrowth. Some investors feel the central bank will have to remain flexible withits monetary policy in case the developing economic recovery stalls.

Lately the British Pound has been trending higher, reachinga major retracement zone. Most of this move has been driven by speculatorslooking for improvements in the U.K.economy while the U.S.economy falters. The recent Second Quarter GDP Report was better than expected;leading some investors to believe the economy is on the road to recovery.Skeptics cite the fact that this reading took place before the austeritymeasures were implemented.

High inflation has also had investors worried. One of thechallenges for the Bank of England will be controlling inflation withoutstifling growth. Uncertainty over how the BoE intends to do this may limitgains and could begin to put pressure on the Sterling.

Technically, the British Pound found resistance at a key.618 retracement level earlier this week at 1.5967. Holding this level couldtrigger the start of a break back to 1.5635. Overnight the Sterling traded below 1.5884, putting thiscurrency lower for the week. The market bottomed early in the trading sessionand put in a short-term top shortly after the central bank announcement.

Although the Pound is trading higher shortly before the New York opening, gainscould be limited as traders stand aside ahead of tomorrow’s U.S. Non-FarmPayrolls Report. This report will offer more insight into the state of theeconomy and influence the Fed’s monetary policy decision at next week’s FOMCmeeting. There is speculation that the Fed will renew its quantitative easingprogram. This along with low interest rates could keep downside pressure on theDollar.