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British Pound Rally to Accelerate on Stronger Recovery, Unanimous BoE

British Pound Rally to Accelerate on Stronger Recovery, Unanimous BoE

David Song, Strategist
British_Pound_Rally_to_Accelerate_on_Stronger_Recovery_Unanimous_BoE_body_Picture_1.png, British Pound Rally to Accelerate on Stronger Recovery, Unanimous BoE

British Pound Rally to Accelerate on Stronger Recovery, Unanimous BoE

Fundamental Forecast for the British Pound: Bullish

The British Pound continued to pare the decline from earlier this year, with the GBPUSD pushing to a fresh monthly high of 1.5433, and the sterling looks poised to appreciate further next week as the Bank of England (BoE) appears to be slowly moving away from its easing cycle. Indeed, the BoE interest rate decision on August 1 highlights the biggest event risk for the following week, but the sterling may track higher ahead of the policy meeting as U.K. Mortgage Approvals are expected to pick up in June, while consumer sentiment is projected to improve for the third consecutive month in July.

Although the BoE pledged to implement a ‘mixed strategy’ for monetary policy, the central bank is widely expected to maintain its current policy next week, and the board may turn increasingly upbeat towards the economy as they anticipate a faster recovery in the second-half of the year. Should the BoE refrain from releasing a policy statement, the move would highlight another unanimous vote in the Monetary Policy Committee, and we may see Governor Mark Carney rely on central bank rhetoric to address the risks surrounding the region as the group remains poised to retain its inflation-targeting framework. Despite speculation of seeing the MPC adopt a growth target, there’s a greater likelihood of seeing the committee adopt forward-guidance for monetary policy as the region continues to face above-target inflation, and the BoE Minutes due out on August 14 may further dampen speculation for more quantitative easing as the U.K. economy gets on a more sustainable path. In turn, the fundamental developments on tap for the following week may spark a more meaningful rally in the GBPUSD, and we may see the sterling continue to retrace the selloff from back in June amid the shift in the policy outlook.

Indeed, the near-term rally in the GBPUSD appeared to be tapering off as the pair failed to maintain the upward trend channel from earlier this month, but the next level to watch is the 38.2% Fibonacci retracement of the 2009 range coming in at 1.5680-90 as it clears the 50.0% retracement around 1.5270. However, the persistent wait-and-see approach at the BoE may keep the GBPUSD within a broad range over the near to medium-term, and we would need to see a more detailed exit strategy coming out of the central bank to see a move back towards the 2013 highs as market participants weigh the prospects for future policy. - DS

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