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British Pound Rebound to Accelerate on Faster Inflation, BoE Minutes

British Pound Rebound to Accelerate on Faster Inflation, BoE Minutes

David Song, Strategist
British_Pound_Rebound_to_Accelerate_on_Faster_Inflation_BoE_Minutes_body_Picture_1.png, British Pound Rebound to Accelerate on Faster Inflation, BoE Minutes

British Pound Rebound to Accelerate on Faster Inflation, BoE Minutes

Fundamental Forecast for the British Pound: Bullish

The British Pound snapped back from a fresh 2013 low of 1.4812 and the GBPUSD may continue to retrace the decline from earlier this year should the Bank of England (BoE) Minutes highlight an improved outlook for the British economy. At the same time, the Consumer Price report may also heighten the appeal of the sterling as the headline reading for U.K. inflation is expected to expand an annualized 3.0% in June, and it seems as though the Monetary Policy Committee will slowly moving away from its easing cycle in the second-half of the year as price growth is expected to hold above the 2% target over the policy horizon.

Moreover, another 8.0K drop in U.K. jobless claims paired with a 0.2% rise in retail also adds to the case of seeing a meaningful rebound in the British Pound, and we may see the sterling appreciate in the second-half of the year as the BoE sticks to its current policy. Nevertheless, there’s still speculation that the BoE will adopt a growth target for monetary policy as Governor Mark Carney takes the helm, but the majority of the MPC may continue to favor the inflation-targeting framework in order to ensure central bank credibility. Although the BoE Minutes may reveal Mr. Carney pushing for a GBP 25B expansion in the Asset-Purchase Facility, the committee remains poised to retain its wait-and-see approach as they anticipate a slow but sustainable recovery in Britain, and we may see a growing number of central bank officials adopt a more neutral to hawkish tone for monetary policy as the region returns to growth. As a result, a slew of positive developments coming out of the U.K. should further dampen speculation for more quantitative easing, and we may see the BoE stick to the sidelines throughout the remainder of the year as the Funding for Lending Scheme continues to work its way through the real economy.

As the GBPUSD carves a near-term base around the 61.8% Fibonacci retracement from the 2009 low to high around 1.4850, the pair looks poised for a broader correction in the days ahead, and we are looking for a move back above the 50.0% retracement (1.5270) as the economic docket is expected to raise the outlook for growth and inflation. However, the pound-dollar may face range-bound prices as the BoE retains a neutral policy stance, but we may see a substantial shift in the policy outlook as the central bank turns increasingly optimistic towards the U.K. economy. - DS

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