The BOE delivered a monetary shock today, increasing its QE package by $84 billion despite our belief the central bank would refrain from injecting more liquidity. After all, we’ve seen very encouraging data from Britain covering services, manufacturing, housing and unemployment. However, it appears the BOE wants to be on the safe side, taking rampant optimism as an opportunity to deliver a blow to the Pound.

The GBP/USD has been on a tear lately, placing the exportation of British manufacturing and services industries at a competitive disadvantage. Hence, the BOE is doing what it can to even the table. One worrying side-effect of today’s injection of liquidity is that Britain’s credit rating has been questioned over the past couple months due to a deteriorating governmental balance sheet. Therefore, even though Britain’s economy is on the path to recovery, additional debt runs the risk of compromising the nation’s credit rating if the global economy should experience a sizable setback.

The BOE’s injection of liquidity is having its desired effect, knocking the GBP/USD below our previous 3rd tier uptrend line on climbing sell-side volume. We believe the Cable could have quite a bit of room to the downside if it doesn’t recovery above our now 2nd tier uptrend line in a hurry. The next worthy supports to the downside appear to be August lows and October 30th highs. Therefore, a retracement towards 1.67 may be in the works. In the meantime, the GBP/USD may not get much immediate-term assistance from the S&P futures since they’re having a difficult time with 1000. The S&P futures aren’t reacting to the lower than expected weekly unemployment claims, showing bulls may be worn out and ready for more profit taking. However, more positive employment data from the U. S. and a better than expected PPI release from Britain tomorrow could help counteract the present pullback and get the GBP/USD back on track.

Meanwhile, investors should avoid having short-term memory loss right now. Economic data from Britain has been overwhelmingly positive lately, and the 2nd quarter earnings season has fared better than analyst expectations. Therefore, there’s little reason to be fundamentally negative on the GBP/USD. While the Cable has quite a bit of mobility to the downside due to its recent strong run, today’s monetary shock from the BOE should only prove temporary. Today’s injection of liquidity shouldn’t have the power to derail the GBP/USD’s medium-term uptrend on its own. Hence, investors should return to their senses after today’s shock wears off. As for the upside, the Cable will have to deal with our new 1st tier uptrend line along with August highs, our 2nd tier downtrend line and the psychological 1.70 level. It seems the GBP/USD will have to consolidate and build a new base before it can think about reattempting these barriers.

Present Price: 1.6809

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