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British Pound To Face Range-Bound Price Action On Mixed Data

British Pound To Face Range-Bound Price Action On Mixed Data

2011-05-20 22:27:00
David Song, Currency Strategist
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The British Pound £

GBP/USD NY Spot Close 1.62421

British_Pound_To_Face_Range-Bound_Price_Action_On_Mixed_Data_body_gbpusd_risk.png, British Pound To Face Range-Bound Price Action On Mixed Data

British Pound To Face Range-Bound Price Action On Mixed Data

Fundamental Forecast for British Pound: Neutral

The British Pound slipped to a fresh monthly low of 1.6110 following the slew of disappointing developments coming out of the U.K., but the sterling may regain its footing over the following week as the economic docket is expected to encourage an improved outlook for growth and inflation. The Bank of England policy meeting minutes weighed on the exchange rate as the Monetary Policy Committee voted 6-3 to keep the benchmark interest rate at 0.50% in May, and the majority may uphold a wait-and-see approach over the coming in order to encourage a sustainable recovery in Britain.

BoE board member Charles Bean continued to endorse a neutral outlook for monetary policy this week and warned that targeting the 2% target for inflation would dampen economic activity as private sector consumption remains subdued. Although Mr. Bean expects to see a gradually expansion in growth, he said the BoE preferred above-target inflation over stagnant growth, and expects consumer prices to remain elevated this year, which has the potential of fueling higher wage demands. Indeed, the balanced tone held by the central bank has dampened speculation for a rate hike in the third-quarter, and the MPC may continue to defy calls to stem the risk for inflation given the ongoing weakness within the real economy.

Nevertheless, investors are still pricing the benchmark interest rate to increase by at least 25bp over the next 12-months according to Credit Suisse overnight index swaps, and the GBP/USD may face range-bound price action over the near-term as market participants weigh the outlook for future policy. However, there could be a growing shift within the MPC as the headline reading for inflation approaches 5%, and the committee may show an increased willingness to start normalizing monetary policy later this year given the stickiness in price growth. As preliminary 1Q GDP report is expected to confirm a 0.5.% expansion in the growth rate, the rebound in private sector activity should help to prop up the sterling, , which could lead the GBP/USD to work its way back towards 1.6400. However, another dismal consumer confidence report could bear down on the exchange rate as household consumption remains one of the leading drivers of growth, and a sharp decline in the pound-dollar could expose former resistance around 1.6000 as the pair searches for support. - DS

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