BoE Inflation Report Review: Mervyn King Down on the UK, GBPUSD Rises

BoE Inflation Report Review: Mervyn King Down on the UK, GBPUSD Rises Bank of England Governor Mervyn King testified in front of Parliament today during the monthly BoE Inflation Report. King’s testimony took place following a worse than expected UK Public Sector borrowing figure was released, which set a pessimistic tone heading into the Inflation Report. Mervyn King did little to dispel the negative tone as he was overall pessimistic with his outlook.

Main statements of Governor Kings’ testimony to the Treasury Department included that he believes that “we are only half way through the crisis,” “I have no idea what will happen in the Eurozone,” the UK’s lack of productivity is a concern, and the door is open for another round of quantitative easing and rate cuts. Mervyn King also added that beyond the Eurozone, he was seeing weakness in Asia. While the Governor didn’t express a specific opinion about the US, he added that the Fed was increasing its worry there.

Overall, King painted a picture of worry and negative outlooks. So naturally the pound has been rallying on the event.

Going into the Inflation Report, the GBPUSD had already been moving higher while the EURGBP was back below 0.8000. As such, it appears that rather than view the Inflation Report as a negative report on the UK and the pound, Forex traders are encouraged by the active stance that the Bank of England is taking.

In Forex, It’s about the present, not the future

One of the themes we have mentioned in the past in regards to Forex trading is that traders despise a lack of clarity. This contrasts equity trading, where a stock can have a terrible quarter, but as long as its forecasts are rosy it can rally. As such, by laying it all of the UK’s problems out in full view, along with potential moves from the Bank of England, Mervyn King’s comments have raised future clarity for Forex traders.

What to Trade; EURGBP Shorts Anyone?

On Twitter, we issued another sell in the EURGBP at 0.7996. (Yes, we know we have been perma-bears on this position and our 0.8040 that we are still short on from earlier this month had both been in and out of the money by 100 pips.) Overall, the appearance of GBP strength even before the BoE Inflation Report took place showed us that Forex traders were looking for reasons to get into the currency. Therefore, even after hearing from BoE Governor Mervyn King what we would have thought to be all the reasons in the world to “AVOID” the GBP, and the currency has continued to rally, we view this as extremely bullish.