Pound Declines Despite BoE Announcement

Posted by Rob

April 21, 2008

The Bank of England announced plans to improve the slowing economy by loaning banks £50bn to enable banks to lend to one-another.

The UK housing market has slowed as banks maintain higher interest rates and cease lending to new buyers. Despite the interest rate cuts that the BoE have instigated, the rate cuts have not been passed down to UK customers, sparking fears of further housing market problems in coming months.

Rather than rising, the GBP fell against the USD on the announcement by the BoE today. The pound dropped 0.5 percent to $1.9883 against the USD, as well as falling 0.5 percent against the Yen to Y205.95. The pound also fell against the Euro by 0.8 percent, to £0.7976.

Traders feel that the fall this week comes of some sharp rises last week, as currency traders priced in rumours of the BoE’s announcement.

Paul Mackel said, “The market was now likely to focus on the UK economy, which has been showing signs of a marked deterioration in recent months. This has boosted expectations that the Bank of England would cut interest rates further to shore up growth.” - FT.com

Technical Chart: GBPUSD

We can see the steady rise of the GBPUSD last week on the hour chart, marked by a sharp fall today after the BoE announced it would assist UK banks with a cash injection.

The price action fell away from the rising resistance level, falling well below the 55-day and the 20-day moving averages.

The stochastic shows us that the GBP is now well into oversold territory, so we can expect to see a pull back. Looking at the Fibonacci retracement lines we can see the price is approaching the 50% line.

If this offers support, we could expect a temporary rally towards the region of the 20-day moving average.

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