FMFX

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Ilian Yotov, The Quarters Theory

When the GBP/USD made its transition into the 1.5000s, the market believed that 2 things were happening in the UK:

1. The UK economy was recovering more robustly than previously expected.
2. 3.1% YoY inflation in the country was still a worry as it still remains well above the Bank of England’s inflation target of 2%.

The market got ahead of itself thinking that robust growth and inflation would be enough to move the BoE to raise interest rates sooner than the market previously expected. Cable bulls gained momentum as evidence of a seemingly strong economy and rising inflation would surely awaken the Bank of England from its monetary policy slumber to not just move on rates but deliver interest rate hikes. POOF!

UK data last week revealed that the economy is just not that strong. The market got its confirmation from the BoE Governor himself as Mervyn King was very dovish in delivering the Bank of England’s Inflationary Report yesterday. He stoked market fears that the BoE would not only hold on monetary policy but was ready to move on more quantitative easing if necessary. The market has has become fearful that a global slowdown is underway and though the economic data has been mildly strong as of late, the UK will also show signs of economic slowing. And that will put the brakes on $GBPUSD’s advance above 1.6000.

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