GBPJPY analysis - British Pound Dominates Against the Majors on Massive Retracement - Can This Continue?

The British pound was the strongest of all the majors not only on Friday, but during the entire week, as the currency trades in a highly speculative manner. Indeed, over the past 5 days, the British pound has rallied 8.6 percent against the New Zealand dollar and roughly 6.3 percent against the euro and Japanese yen in an attempt to recoup the massive losses accumulated between October 2008 and January 2009.

However, with both Credit Suisse overnight index swaps and a Bloomberg News poll reflecting expectations that the Bank of England will cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 1 percent., it’s worth wondering how far this British pound rally can extend.

There are few doubts that the BOE will at least consider slashing rates again since the UK remains in a deep recession and officials anticipate that things will only get worse. In fact, BOE Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, issued very dovish comments on January 29, saying that the UK economy may face a recession worse than that of the one in the 1980’s and that the Bank Rate needs to be cut “further and quickly.”

Furthermore, he said that the MPC has considered their options in the case that the Bank Rate is cut to zero, which was quite timely comment when you consider that Chancellor of the Exchequer Alistair Darling gave the BOE permission today to buy 50 billion pounds worth of bond and commercial paper in order to alleviate tight credit conditions. Overall, this leaves the odds in favor of year another rate cut by the BOE on February 5, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee’s subsequent statement.



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