The resilience of the British pound is surprising many traders. Of all the major currencies, the pound dropped the least against the dollar. In fact, it ended the U.S. trading session virtually unchanged. The currency’s strength can also be seen in EUR/GBP, which fell to a 2 month low. The strength of the sterling is due in part to the stronger than expected inflation numbers. Consumer prices rose 0.2 percent in October, driving the annualized pace of CPI growth up to 1.5 percent from 1.1 percent; core CPI rose from 1.7 to 1.8 percent. Inflation is a big focus of the central bank and the evidence of stronger inflationary pressures on both a core and headline basis could reduce the odds of further Quantitative Easing by the Bank of England. QE will be the main focus tomorrow with the minutes from this month’s monetary policy meeting due for release. Earlier this month, the BoE increased their QE program by GBP 25 billion, which was 50 percent less than the market had anticipated. Traders will be looking at the minutes for clues on why the BoE made the smaller move and how many members voted in favor of a 25B vs. 50B increase in the QE program. Yesterday, BoE member Sentance gave us a taste of how the central bank may feel. Based upon his comment that the next major QE decision will be in February, we believe that the central bank hasn’t made up their mind yet. Incoming economic data including this morning’s inflation numbers argue against additional easing and if the minutes reveal similar hesitancy by the BoE, the pound could extend its gains. The price action in the GBP/USD certainly suggests that traders are already positioning for a less dovish outcome.
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