Despite Inflation, BoE May Buy Bonds, Bernanke to Follow?

On Wednesday, the Bank of England's minutes showed that policy makers were considering additional bond purchases as the British economy continues to struggle. The Bank of England's Monetary Policy Committee voted 8-1 to maintain the bond-purchase program at 200 billion pounds, Bloomberg reported. The news may come to the detriment of British savers. The UK has been ravaged with inflation in recent months. In May, the British consumer price index rose 4.5% on an annualized basis. Unfortunately for consumers in the UK, inflation has not come with rapid economic growth. Many emerging market economies, such as China and Turkey, are currently struggling with high rates of inflation. However, inflation in these countries has generally been paired with tremendous economic expansion. Yet, the British economy continues to struggle. At present, the unemployment rate in the UK sits near 8%. Last year, Prime Minister David Cameron rose to power, perhaps on the hope that his Conservative Party would be able to salvage Britain's ailing economy. Since that time, the UK has implemented austerity measures, but the economy has failed to improve. On Tuesday, Cameron stated that the UK would not be participating in any additional Greek rescue packages. Should Greece default, it will be interesting to see how it affects the UK. The country is presently a member of the European Union, but does not participate in the euro currency. With the economy is the U.S. stalling and Congressional leaders calling for American austerity measures, traders may wonder if the Federal Reserve will follow the Bank of England's lead. Many have speculated that Bernanke would hold off on additional quantitative easing due to inflationary pressures. The Bank of England's decision may throw that assumption into doubt. Action Items Bullish: Traders who believe that Fed will follow the Bank of England's lead and continue to ease in spite of inflation might want to consider the following trades:

• Buy SPDR Gold Trust GLD in a long play on gold. Gold rallied following the implementation of QE2, and may rally further with additional QE.
• Short Power Shares DB US Dollar Bullish Index UUP in a short play on the U.S. dollar. If the Fed continues to ease, the dollar may weaken further, and UUP may do poorly.

Bearish: Traders who believe that rising CPI will prevent the Fed from conducting more quantitative easing may consider taking positions in the following:

• Pro Shares Ultra Short 20+ Year Treasury TBT is a short play on U.S. bonds. Bond yields may spike if the Fed does not intervene further.
• United States Short Oil Fund DNO is a short oil play. If the Fed does not continue to buy, the U.S. economy may contract, and demand for oil may fall.

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