GBP/USD Weakens after MPC Rejects Higher Interest Rates

The GBP/USD fell sharply on Wednesday after the Bank of England said policymakers were unanimous in rejecting higher interest rates, driving down demand for the British Pound. The nine-member Monetary Policy Committee also voted 9-0 to keep their quantitative easing target at 375 billion pounds ($606 billion) according to the minutes of the October 8-9 meeting.

Speculators have been trying to build a case for the central bank to begin raising interest rates sooner than expected. This includes driving up the Sterling on the heels of better-than-expected economic data at a time when the central bank had warned them to remain cautious.

In August, BoE Governor Mark Carney revealed forward guidance on the future path of interest rates, saying the central bank policy makers wouldn’t consider raising borrowing costs until unemployment declines to 7 percent, something officials didn’t think would happen until at least 2016. Speculators have however taken it upon themselves to drive the GBP/USD higher on almost every piece of positive economic news. This may have set them up for a serious correction.

Tomorrow, Carney is likely to address this issue and offer more guidance which could create volatile trading conditions especially to the downside if he reiterates his original stance that rates would remain low for another three years.

After early session weakness, the EUR/USD fought back to unchanged for the day. The single currency was under pressure early after China revealed that several major Chinese lenders wrote off about $3.7 billion in bad debt for the first six months of the year, higher than last year. In addition, a spike in short-term Chinese money rates pressured demand for higher risk assets, leading to a sell-off in the Euro.

After the U.S. Dollar couldn’t follow-through to the upside, the Euro mounted an intraday short-covering rally which has it in a position to post a new high for the year.

December gold traders took profits on Wednesday after a strong surge yesterday. The move in gold was triggered by a drop in the dollar following a weaker-than-expected jobs report. This move solidified the thought that the Fed would continue its stimulus plan at least until the end of the year. This pressured interest rates and the U.S. Dollar.

The overnight flight to safety rally into the U.S. Dollar because of the negative news from China gave gold investors an excuse to pare positions. Although this looks like a short-term reaction to the news, it could turn into a full-blown correction if investors feel gold is overpriced. Stock market weakness could underpin the market and limit losses today if equity markets continue to sell off hard into the close.

Heavy fund liquidation and technical selling pressure hit crude oil hard for the third straight day, taking out a key support level at $98.17. Speculators began to slash positions on Monday ahead of the U.S. jobs report, but really poured it on after the report came out weaker-than-expected. Today’s reaction confirmed that investors feel the economy is weak enough to trigger a drop in demand. This should push up supply levels.