For inflation to return back towards the 2% target, the MPC (Monetary Policy Committee) quoted "requires balancing the drag from external factors against increases in domestic cost growth. Fully offsetting that drag over the short run would, in the MPC’s judgement, involve too rapid an acceleration in domestic costs, one that would risk being unsustainable and would lead to undesirable volatility in output and employment. "
The MPC will set monetary policy to return inflation to 2 percent in the next two years. In order to do this the MPC must ensure that growth is sufficient to keep inflation at target which will largely depend on economic circumstances. The minutes showed that the UK economy domestically strengthened but with concerns with global outlook. This was in line with the FED (Federal Reserve) comments on Wednesday as they scaled back their interest rate hikes from four to two for 2016.
British Pound Analysis
The British Pound overnight rallied 1.4 percent to $1.4464 and with it being the weakest performing currency out of the G10 group of currencies due to "Brexit" fears. After reaching the lows of $1.3820, the GBP has rallied and is currently sitting around $1.4475 on the back of a weaker US Dollar. The US Dollar has been smashed over the last few days after the FED gave more dovish statements and reduced the amount of interest rate rises in 2016.
Taking a look at the daily chart we see the overall trend is obviously down but what seems to be forming is an Inverted head and shoulders. It's not a perfect setup at the right shoulder has formed a lower peak to the left shoulder. With the neckline being at the 38.2% fibonacci level at $1.4626 and that is further supported with a resistance at that level back in February 2016 and a support area back in March and April in 2015. If we take into consideration also the overall downtrend, the 38.2% Fibonacci level becomes a very critical point.
Will we see a higher Sterling in the short term? Over the next week we have high impact news in the way of CPI y/y which has been mostly flat ion 2015 and is starting to pick up in 2016. Retail sales last month we saw surge in the volume in sales. This reinforces the picture of an economy largely driven by domestic demand. With UK inflation close to zero and low unemployment boost consumer spending. With a weakening US dollar we could see the currency test the $1.4600 level.