Overnight Strength In European And Asian Session Boosting Higher Risk Assets

Traders are calling for a higher opening in the September British Pound this morning. Overnight strength in European and Asian equity markets is helping to increase trader demand for higher risk assets.

After a six-day sell-off, the British Pound is attracting buyers. Fundamentally this market has been getting beat-up since June 30th when an economic report showed that the U.K. economy had its worst quarter since 1958. Since then there have been signs that the economy is improving. The service sector is beginning to show growth, housing prices have stabilized and inflation is running ahead of the Bank of England’s target.

Despite these small signs of recovery, the Bank of England is expected to leave interest rates at their historically low level of 50 basis points when it makes its interest rate announcement early this morning.

Investors do not expect the BoE to touch interest rates until they are absolutely sure the U.K. economy is well on its way to recovery. Although there are small signs of a recovery, credit issues still exist with lending to businesses well down from recent peaks. Mortgage approvals are also down which is a common problem all around the world.

Interest rates may not be an issue at this time, but rumors that the Bank of England would increase the level of funds available for quantitative easing helped trigger a sharp sell-off in this market since Sunday night.

Quantitative easing, which is essentially the printing of money, is an economic program in which the central bank buys government assets. It is a very dangerous maneuver because it can lead to an inflationary environment which will lead to a debasing of the economy.

The British Pound should rally if quantitative easing is left out of the plans of the Bank of England. Traders should watch today’s central bank statement to see how committed it is to buying government assets.

Should the BoE mention that it would increase its activity in the asset buyback program then look for the British Pound to feel downward pressure.

Technically, the September British Pound is in a down trend, however it may be short-term oversold. This means this market may retrace 50% of its recent break back to 1.6362 to 1.6452.

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