Forex Trading: GBP under pressure as GDP disappoints

The UK GDP came out weaker than expectations and the component pieces of the report painted an even bleaker picture. Business Fixed Capital formation was down 5.3% on the quarter - the biggest fall in 23 years.  Consumer Consumption was down 0.5% (the lowest since the 2nd quarter 2005).  Government spending kept fiscal policy up, growing by 0.5% (at least they had that).  Exports were down 0.5% and Imports were down a greater 1.4%. 

It was not pretty. 

The problem for the UK is the inflation rate.  Looking at the last time YoY growth was this low back in March of 2002, the UK inflation rate as measured by CPI was 1.5%.  The Base Rate was at 4%. 

Today, the inflation rate at the end of the 2nd quarter was 3.8% (it is now 4.4%).  The BOE because of its intention to keep longer term inflation within a 2% to 3% range has been forced to keep the Base Rate steady at 5%. 

Now the central bank has to wrestle with slow recessionary growth and high inflation. 

Will the BOE antiicipate lower inflation down the road and cut rates whiile the Base Rate to CPI spread is still at historcally narrow levels?  Or, will they stay the course and keep rates high to wring out internal inflaton and lead the country to an even sharper downturn? 

Either way, the answer is not condusive to a strong GBP.  As a result, the GBP should remain under pressure in the longer term.