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British Pound to Benefit From 1Q GDP as U.K. Returns to Growth

British Pound to Benefit From 1Q GDP as U.K. Returns to Growth

David Song, Strategist
British_Pound_to_Benefit_From_1Q_GDP_as_U.K._Returns_to_Growth_body_Picture_1.png, British Pound to Benefit From 1Q GDP as U.K. Returns to Growth

British Pound to Benefit From 1Q GDP as U.K. Returns to Growth

Fundamental Forecast For British Pound:Neutral

- GBPUSD Tests Key Threshold- Scalping the 1.54 Pivot

- GBP/USD Short Trade Held Below 1.53

- British Pound Stops and Reverses - Is it a True Breakdown?

The British Pound struggled to hold its ground as Fitch Ratings lowered the U.K.’s AAA credit rating to AA+, and the GBPUSD may continue to give back the rebound from 1.4830 should it fail to maintain the upward trending channel carried over from the previous month. However, the advance 1Q GDP report on tap for the following week is expected to show the region returning to growth, and a positive development may prop up the sterling as it dampens the Bank of England’s (BoE) scope to expand the balance sheet further.

Indeed, the BoE Minutes showed another 6-3 split within the Monetary Policy Committee, with Governor Mervyn King, David Miles and Paul Fisher voting for a GBP 25B expansion in the asset purchase program, but it seems as though the majority will stick to the sidelines amid an upward drift in inflation expectations. Although the U.K. is expected to face a ‘muted’ recovery, it appears as though the BoE is slowly moving away from its easing cycle as the board sees scope to extend the Funding for Lending Scheme, and the shift in the policy outlook may carry the sterling higher over the near to medium-term as market participants scale back bets for more quantitative easing. However, central bank dove Martin Weale argued weaker inflationary pressures would raise the case for more QE, and warned that the 1Q GDP report may disappoint amid the ongoing slack in the real economy.

Nevertheless, it seems as though the MPC will retain its wait-and-see approach going forward, and the sterling may continue to recoup the losses from earlier this year as the economic recovery in the U.K. slowly picks up.

As the GBPUSD struggles to hold above the 50.0% Fibonacci retracement from the 2009 low to high around 1.5260, the pair may track sideways ahead of the growth report due out on April 25, and we should see a move back towards the 38.2% retracement (1.5680) as long as the pair maintains the bullish trend carried over from March. However, the sterling may come under pressure early on in the week as Public Sector Net Borrowing is projected to increase another GBP 13.8B in March, and the negative outlook tied to the U.K.’s credit rating may continue to drag on the exchange rate as the push for austerity drags on the real economy. –DS

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