BoE’s Hawkish Quarterly Inflation Report Ignites GBP-crosses

Talking Points:

- GBPUSD rips back above 1.5300 on BoE's QIR.

- Key reversals in GBPAUD, GBPCAD, EURGBP lead way.

- See the February Forex Seasonality report and the implications for the majors.

Optimism within the Bank of England's Quarterly Inflation Report about domestic conditions in the UK have spurred the British Pound to fresh weekly, monthly, and in some cases, multi-year highs. We say domestic conditions explicitly because BoE Governor Carney and the Monetary Policy Committee attempted to walk a neutral line in their release, although it certainly didn't feel that way.

Through and through, the blame for disinflation seen in the UK - which prompted the BoE to cut its 2015 inflation forecast from +1.4% to 0.5% - was in large part placed at the feet of the external environment (falling energy prices, global deflation trend). Policymakers painted nothing short of a rosy picture for the UK itself: growth would accelerate to +2.9% in 2015 and 2016, and come in at +2.7% in 2017; the unemployment rate would continue to fall to 5.0%; slack in the economy would likely be eliminated in 18-months, probably occurring this year; and real wage growth in 2015 would be the highest of the decade.

So even though Governor Carney et al. included a mandatory 'we're prepared to do more QE if things get worse' phrase, the sentiment has rang hollow at best. GBPUSD rallied quickly back above $1.5300; EURGBP dropped back to seven and a half year lows under £0.7400; and GBPAUD and GBPCAD continued in their recent breakouts.

Irrespective of our interpretation of the BoE's QIR, the technical foundation laid around this report is encouraging for GBP bulls. On the H4 timeframe, bullish key reversals (price moves below the prior period low, then rallies to and achieves a close above the prior period high) are seen developing across the spectrum. At a minimum, they offer explicit levels to work around for long entries. Having been involved in several long GBP trades the past few weeks (long GBPAUD, GBPCAD, and short EURGBP), these candles offer clear points of risk moving forward.

See the above video for technical considerations in GBPUSD, EURGBP, GBPAUD, and GBPCAD.

Read more: EUR/USD Coils in 100-pip Range; GBP-crosses Breakout Before BoE

--- Written by Christopher Vecchio, Currency Strategist

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