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Wednesday, May 16, 2007

Sterling Outlook (16th May 2007)

Cable dropped to 1.9825 bids after the 09:30GMT publication of May's quarterly BoE inflation report, primarily on the back of comments from Mervyn King. The BoE Governor says if UK wage pressures diminished, it would suggest upside risks to UK CPI had receded (Reuters). Annualized average UK earnings rose by a sub-forecast 4.5% in the three months to March.

The BoE inflation report suggests the UK base rate may need be hiked by another 25bp to 5.75% in Q3, possibly in August. Additional sterling demand is noted at 1.9800. Sub-figure support points include 1.9775, 1.9765 and 1.9750. There is speculation that sovereign demand helped base GBP/USD at one-month lows circa 1.9750 yesterday, post-UK CPI.

1.9841 (pre-BoE inflation report low) is now a resistance level. Upper obstacles include 1.9860 and 1.9875 (early Europe high). Some buy stops are pegged above 1.9880. 1.9905-10 option strikes roll off at 14:00GMT today.

US April housing starts will be unveiled at 12:30GMT. Forecast: 1480k. US April IP and CU numbers ensue at 13:15GMT.

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