GBP/USD: Bank of England chooses sound money

NEW YORK (Forex News Now) – The Bank of England has chosen not to start with another round of stimulus, making the central bank lean towards the exact opposite direction of the Federal Reserve. The British have recently began to start to work on massive spending cuts, and the results are starting to show up in the British pound / U.S. dollar’s FX rate.

While the interest rate decision at 8:00 AM GMT was not a surprise, as the bank chose to hold, there were some telling signals. Most notably, the central bank has chosen not to follow the Federal Reserve down the road of quantitative easing. As the supply of Pounds is not being ratcheted up, as opposed to the Dollar, this should signal another round of cable strength in the FX rate.

The central bank announced that it is holding its bond purchases at 200 billion Pounds, signaling that the bank is not looking to “print” additional Pounds in the future. This should bode well for the Pound’s strength around the world.

Going to the charts, on the daily we have a strong uptrend line that has held since the middle of May this year. The GBP/USD pair has been in a relentless uptrend since that bottom, and had recently found serious resistance at the 1.60 handle, as shown by the horizontal line drawn in red.

The red arrow points out a recent “shooting star” candle that was the top of the recent move up. When a candle like this forms at a “round number” like the 1.6000 handle, it is a sign that the area could be serious resistance. When prices “negate” a bar like this, and at an area like this, it is an extremely bullish signal.

Looking at the larger time frames, it appears the FX rate for this pair is probably heading towards the 1.70 handle.