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British Pound Holds Key Support- Lacks Direction Ahead of BoE Minutes

British Pound Holds Key Support- Lacks Direction Ahead of BoE Minutes

2013-07-05 21:21:00
David Song, Strategist
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British_Pound_Holds_Key_Support-_Lacks_Direction_Ahead_of_BoE_Minutes_body_Picture_1.png, British Pound Holds Key Support- Lacks Direction Ahead of BoE Minutes

British Pound Holds Key Support- Lacks Direction Ahead of BoE Minutes

Fundamental Forecast for the British Pound: Neutral

The British Pound nearly gave back the rebound from March (1.4830) as the Bank of England (BoE) struck a rather dovish tone for monetary policy, but the sterling may regain its footing next week as the fundamental developments coming out of the U.K. are expected to highlight an improved outlook for growth. Indeed, rising home prices along with a rebound in manufacturing may highlight a stronger recovery in Britain, and we may see a more meaningful rebound in the GBPUSD should the data dampen speculation for additional monetary support.

As the rise in U.K. market rates dampen the fundamental outlook for the U.K., there’s growing bets that the Monetary Policy Committee will further embark on its easing cycle in the second-half of the year, while there’s speculation that the BoE will use forward-guidance for monetary policy in order to encourage a stronger recovery. Indeed, the fresh batch of central bank rhetoric has raised the scope of seeing the MPC implement a growth target for the U.K., but the majority may favor the inflation-targeting framework as the committee struggles to achieve the 2% target for price growth. In turn, the BoE Minutes due out on July 17 may reveal another 6-3 split should Governor Mark Carney side with the minority, and the new central bank head may struggle to implement new measures as the board sees a slow but sustainable recovery in Britain. Nevertheless, as BoE board member David Miles is scheduled to speak next week, the central bank dove may present further arguments to expand the Asset Purchase Facility (AFP) beyond the GBP 375B target, but it seems as though the MPC will stick to its current policy amid the positive developments coming out of the region.

As the GBPUSD holds above the March low, the pair should continue to come off of the 61.8% Fibonacci retracement from the 2009 low to high around 1.4850, and we may see a near-term correction take shape next week as long as the relative strength index trades above oversold territory. However, as market participants weigh the outlook for monetary policy, the GBPUSD may face range-bound prices ahead of the BoE Minutes, and the updated vote count should provide a clearer directional bias for the pound-dollar as Mr. Carney takes the helm of the MPC. - DS

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