THE TAKEAWAY: BoE inflation report sees inflation above 2% for next two years -> King makes dovish comments at press conference -> GBP/USD hits a new six month low

The Bank of England said it sees inflation quickening and remaining above 2% for two years and the UK economy experiencing a slow recovery with downside risks. However, the remarks from the 3-month inflation report were as-expected, and it was BoE Governor’s dovish comments which caused the British Pound to set a 6-month low against US Dollar.

King said in a press conference after the release that the higher inflation must be looked at by the BoE alongside the struggling economy, and trying to subdue inflation could hurt growth. King said the central bank is extremely supportive of output and is willing to increase stimulus if necessary. King said a recovery is in sight, but growth will be weak in the near term. The comments sent GBP/USD down 100 points to 1.5550.

Regarding the Pound exchange rate, Governor King said rebalancing the economy is a difficult challenge, and Pound depreciation is a necessary condition for rebalancing. Regarding yesterday’s G7 release about exchange rates, King agreed that currency movements that are an unintentional result of monetary stimulus must be allowed, but he indirectly criticized Japan for calling the release supportive of Japanese monetary policy. USD/JPY rose to a session high around 93.75 on the comments.

A spokesman for Prime Minister Cameron responded to the report by saying the PM sees the UK economy healing. GBP/USD is now trading around 1.5570 in Forex markets, and support might be provided by the six month low set today at 1.5533. Resistance could be provided by a broken support line around 1.5662.

France has hit some recent economic troubles, as was clearly indicated by January’s declining Purchasing Managers’ Index. Finance Minister Moscovici said today that the country’s 2013 targets will be difficult, and growth targets will be reconsidered on March 15. Another minister said France maintains a 3% budget target for 2013.

GBPUSD Daily: February 13, 2013

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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