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British Pound Rebound to Gather Pace on Faster Inflation, BoE Minutes

British Pound Rebound to Gather Pace on Faster Inflation, BoE Minutes

David Song, Strategist
British_Pound_Rebound_to_Gather_Pace_on_Faster_Inflation_BoE_Minutes_body_Picture_1.png, British Pound Rebound to Gather Pace on Faster Inflation, BoE Minutes

British Pound Rebound to Gather Pace on Faster Inflation, BoE Minutes

Fundamental Forecast for British Pound: Bullish

The British Pound snapped back from a fresh yearly low of 1.4830 and the GBPUSD remains poised to track higher in the coming days should the Bank of England (BoE) talk down speculation for more quantitative easing. Although the central bank’s policy meeting minutes highlight the biggest event risks for the following week, heightening price pressures in the U.K. may foster a bullish outlook for the sterling as the Monetary Policy Committee sees inflation holding above the 2% target over the policy horizon.

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The U.K. Consumer Price report is expected to show the headline reading for inflation increasing an annualized 2.8% following the 2.7% expansion in January, and an uptick in price growth may prompt the MPC to adopt a more hawkish tone for monetary policy as it sees a slow but sustainable recovery ahead. Indeed, the BoE Minutes may reveal another 6-3 split within the committee as the central bank keeps the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, and we may see the central bank slowly move away from its easing cycle as the Funding for Lending Scheme continues to work its way through the real economy. Moreover, BoE Chief Economist Spencer Dale argued that the central bank should stick to its inflation-targeting framework to preserve its credibility, and it seems as though the MPC will stick to the sidelines for most of 2013 in an effort to deliver price stability. In turn, the fresh batch of central bank rhetoric may carry the British Pound higher over the near to medium-term, and we may see the BoE start to discuss a tentative exit strategy in the second-half of the year as growth and inflation picks up.

As the GBPUSD fails to put in a close below the 61.8% Fibonacci retracement from the 2009 low to high around 1.4840-50, the rebound from the yearly low (1.4830) should gather pace going into the BoE Minutes, and we may see the pair trade back above the 50.0% Fib (1.5260) as the relative strength index comes off of oversold territory. Nevertheless, former support around the 50.0% retracement may serve as new resistance as the pair breaks down from the multi-year range, but a slew of positive developments may bring the 38.2% Fib (1.5680) back into focus as the fundamental outlook for the U.K. improves. - DS

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