Sterling Outlook Hinges on BoE Minutes- Higher Low in the Making?
Fundamental Forecast for British Pound:Bullish
The British Pound failed to maintain the upward trend from earlier this year, with the GBPUSD slipping to a fresh monthly low of 1.5156, but the sterling may regain its footing in the week ahead should the Bank of England (BoE) Minutes further dampen speculation for more quantitative easing. Although the policy statement highlights the biggest event risk for the following week, the headline reading for U.K. inflation is expected increase an annualized 2.6% in April following the 2.8% expansion the month prior, and a marked slowdown in price growth may limit the appeal of the sterling as the central bank looks to target the risk for inflation.
Nevertheless, the BoE struck a rather upbeat tone for the U.K. economy as the central bank now sees a ‘modest’ recovery in the region, and we may see the Monetary Policy Committee slowly move away from its easing cycle as Britain skirts a triple-dip recession. As the BoE raises its outlook for growth, MPC member Martin Weale struck a rather hawkish tone for monetary policy and said that there’s limited scope to expand the Asset Purchase Facility beyond the GBP 375B target as it presents a risk to inflation expectations. Although we anticipate the BoE Minutes to reveal another 6-3 split with the committee, the fresh batch of central bank rhetoric may further diminish bets for additional monetary support, and the MPC may start to discuss a tentative exit strategy in the second-half of the year as the Funding for Lending Scheme continues to work its way through the real economy. In addition, the U.K. Retail Sales report may also increase the appeal of the sterling as household spending is projected to increase 0.1% after contracting 0.8% in March, and a rebound in private sector consumption may generate a bullish reaction in the GBPUSD as it remains one of the leading drivers of growth.
As the GBPUSD holds above the April low (1.5032), we may see the pair continue to carve a higher low during the final days of May, and the British Pound may track higher going into the second-half of the year amid the shift in the policy outlook. In turn, we will maintain a bullish forecast for the GBPUSD over the near to medium-term, and will continue to look for another run at the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680 as market participants scale back bets for additional monetary support. – DS
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