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British Pound Rebound Vulnerable to BoE Forward-Guidance

British Pound Rebound Vulnerable to BoE Forward-Guidance

2013-08-02 21:20:00
David Song, Strategist
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British_Pound_Rebound_Vulnerable_to_BoE_Forward_Guidance_body_Picture_1.png, British Pound Rebound Vulnerable to BoE Forward-Guidance

British Pound Rebound Vulnerable to BoE Forward-Guidance

Fundamental Forecast for the British Pound: Neutral

The British Pound struggled to hold its ground even as the Bank of England (BoE) retained its current policy in August, and the sterling may face additional headwinds in the week ahead amid growing speculation that the central bank will adopt forward-guidance for monetary policy. Nevertheless, it seems as though there was another unanimous vote within the Monetary Policy Committee (MPC) as the central bank refrained from releasing a policy statement, but the quarterly inflation report may dampen the appeal of the British Pound as the MPC pledges to implement a ‘mixed strategy’ for the U.K. economy.

Indeed, there are growing bets that the BoE will implement a ‘qualitative’ approach for monetary policy, which could include a potential threshold for unemployment and inflation, and a shift in the policy outlook may force the British Pound to give back the rebound from 1.4812 as it raises the scope of seeing the MPC retain its highly accommodative policy for an extended period of time. However, the majority of the MPC may continue to favor a wait-and-see approach as they anticipate a faster recovery in the second-half of the year, and there’s limited scope of seeing the BoE move away from its inflation-targeting framework as the U.K. is expected to face above-target price growth over the policy horizon.

At the same time, the updated forecast from the BoE may reflect an improved outlook for growth as the fundamental developments coming out of the U.K. exceeds market expectations, and we may see the BoE slowly move away from its easing cycle as the Funding for Lending Scheme (FLS) continues to work its way through the real economy. In turn, we may see BoE Governor Mark Carney rely on central bank rhetoric to address the downside risks surrounding the region, and the sterling may continue to recoup the losses from earlier this year as market participants scale back bets of seeing additional monetary support.

As the GBPUSD appears to have found interim support around the 1.5100 handle, positive developments coming out of the U.K. may prop up the British Pound ahead of the BoE inflation report, but the near-term outlook will be largely dependent on the BoE’s language as market participants weigh the outlook for monetary policy. As a result, a less dovish BoE should pave the way for a move back towards the 38.2% Fibonacci retracement of the 2009 range around 1.5680-90, but the GBPUSD may struggle to maintain the rebound from July should the MPC implement more policies to encourage a stronger recovery in the U.K. - DS

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