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Sterling rallies after dovish BoE statement

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Sterling rallies after dovish BoE statement

The Bank of England shook up the capital markets with forward guidance from their interest rate meeting that surprised market participants.  Sterling gyrated post the announcement, moving lower by more than a big figure before rebounding nearly 2.5 big figures on heavy volume.

The Bank of England’s forward guidance reflected the sentiment and craftiness of new head Mark Carney. The BOE effectively signaled that rates would remain low for the foreseeable future and tied to unemployment.  The new guidance would keep interest rates at their current levels, along with the MPC bond purchase program until unemployment fell below 7%.

The BoE said that believe rates would remain at current levels until at least the third quarter of 2016.  The BOE also left the door open to resuming gilt purchases, and potentially adding to those purchases to stimulate growth.

The BOE’s inflation forecast was reduced with the consumer price index hitting its nadir in the fourth quarter of 2013 at 2.9%.  It forecasts GDP to grow 0.6% in 2013 and 2.6% over the next two years, up from 2.2%.  Given BOE forecasts, which show the unemployment rate is more likely than not to be above 7% until 2016, the guidance now suggests no tightening in policy for the next 2½ years. The official unemployment rate was 7.8% in the three months to May.

Sterling broke above resistance near the 1.5435 level and is poised to test the June highs near 1.57.  Momentum is positive with an upward sloping trajectory, after generating a buy signal in early August.  This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The RSI is edging higher and printing at 59 which is the upper end of the neutral range.

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