Will Above – Target Inflation in the U.K. Translate Into British Pound Gains?
Consumer prices in the U.K. are expected to advance an annualized 3.5% in April after expanding 3.4% the previous month, which will mark the second highest reading since November 2008. Economists are forecasting inflation to push higher as company spending strengthens on the back of higher earnings, while consumer sentiment has improved since the start of the year amid an improving labor market. Also, the European Commission has doubled its forecast for growth for the region this year, stating that the government deficit will drop to 9.5 percent of economic activity in March 2012 from 12.2 percent in the period that ended in March.
In the Bank of England’s quarterly inflation forecast, the report showed that consumer prices would be just below its 2 percent target in two years time, even if rates do not push higher. Meanwhile, Bank of England Governor Mervyn King stated that the financial crisis is far from over, and added that “the banking crisis has turned from a financial crisis to a sovereign debt crisis.” Looking ahead past the inflation reading, the British pound may continue to trade in line with the global equity markets as investors wait for a reading on the fiscal landscape. It is also noteworthy that the ongoing Euro-zone uncertainties surrounding monetary and fiscal policy will likely weigh on the exchange rate as investors consider the prospects for a sustainable recovery. All in all, if figures are released in line or exceed expectations, the British pound may experience a short term bounce, which will validate the short term technical outlook.
GBP/USD: The pair has extended its three day decline to reach a intraday low of 1.4251 which maybe the fifth wave down from the corrective fourth wave. It is noteworthy that daily studies are showing that the pair is deep in oversold territory and may result in a slight rebound in the near term.
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Written by Michael Wright, Daily FX Research
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