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British Pound to Retain Bullish Trend- BoE Inflation Report in Focus

British Pound to Retain Bullish Trend- BoE Inflation Report in Focus

David Song, Strategist
british_pound_forecast_body_Picture_5.png, British Pound to Retain Bullish Trend- BoE Inflation Report in Focus

British Pound to Retain Bullish Trend- BoE Inflation Report in Focus

Fundamental Forecast for British Pound: Bullish

The British Pound threatened the bullish trend dating back to March as the GBPUSD tumbled to a fresh monthly low of 1.5313, but the selloff may be short-lived should the Bank of England strike an improved outlook for the U.K. Indeed, the BoE’s inflation report highlights the biggest event risk for the following week, and the quarterly update may dampen bets for more quantitative easing as the central bank sees a slow but sustainable recovery in Britain.

As the U.K. economy skirts a triple-dip recession, the BoE may show a greater willingness to address the stickiness in price growth, and the central bank remains poised to operate under its inflation-targeting framework as the recovery slowly gathers pace. We may see a growing number of central bank officials make an attempt to talk up the credibility of the BoE as inflation has held above the 2% target since December 2009, and the Monetary Policy Committee may adopt a more neutral to hawkish tone for monetary policy as the fundamental developments coming out of the U.K. raises the prospects for future growth. As Jobless Claims are expected to contract another 3.0K in April, the British Pound may regain its footing ahead of the May 15 report, and the sterling may also benefit from the BoE Minutes due out on May 22 as the policy statement is anticipated to show another 6-3 split within the MPC. In turn, we may see a sharp reversal in the GBPUSD next week, and the bullish sentiment surrounding the British Pound may pick up over the near to medium-term as the central bank appears to be slowly moving away from its easing cycle.

Although the GBPUSD pierced through trendline support, the pair appears to be carving out a higher low as it holds above the 50.0% Fibonacci retracement from the 2009 low to high around 1.5260, and the upward trending channel in the pound-dollar may continue to take shape as the BoE scales back its willingness to expand the balance sheet further. As a result, the GBPUSD we are still looking for a run at the 38.2% retracement around 1.5680, and the sterling may continue to retrace the sharp decline from earlier this year amid the shift in the policy outlook. - DS

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