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Bullish British Pound Trend to Gather Pace- Broader Range in Focus

Bullish British Pound Trend to Gather Pace- Broader Range in Focus

David Song, Strategist
Bullish_British_Pound_Trend_to_Gather_Pace_Broader_Range_in_Focus_body_Picture_1.png, Bullish British Pound Trend to Gather Pace- Broader Range in Focus

Bullish British Pound Trend to Gather Pace- Broader Range in Focus

Fundamental Forecast for the British Pound: Neutral

The British Pound surged higher following the Bank of England (BoE) inflation report, with the exchange rate climbing to a monthly high of 1.5573, and the upward trending channel in the GBPUSD may continue to take shape next week as the economic docket is expected to highlight an improved outlook for growth. Indeed, a ninth consecutive decline in U.K. Jobless Claims along with a 0.6% rise in Retail Sales should raise the scope for a faster recovery in the second-half of the year, but the Consumer Price report raises the risk of seeing a near-term pullback in the pound-dollar as the headline reading for inflation is expected to narrow to an annualized 2.8% from 2.9% in June.

Although the BoE adopted a 7.0% threshold for unemployment, the central bank added the inflation ‘knock out,’ which sparked speculation that the Monetary Policy Committee may have to start normalizing monetary policy ahead of schedule, and the shift in the policy outlook may continue to prop up the sterling as the board has failed to achieve the 2% target for price growth since late 2009. Given the MPC’s track record, the risk of seeing inflation expectations being unanchored may become a growing concern for the committee, and a stronger-than-expected U.K. CPI print may spark another short-term rally in the British Pound as it dampens the BoE’s scope to retain its highly accommodative policy stance.

With the inflation report out of the way, the BoE Minutes due out on August 14 may have a limited impact on the sterling, but the policy statement should show another unanimous vote, with the central bank turning increasingly upbeat towards the economy as the economic recovery gradually gathers pace. Former BoE board member Charles Goodhart argued that the ‘British recovery is probably somewhat underestimated’ and said that the MPC may ultimately deliver a rate-cut ahead of the third-quarter of 2016 as the economy gets on a more sustainable path.

Despite the risk of seeing a short-term pullback in the GBPUSD, the upward trending channel from the July low (1.4812) should gather pace as the fundamental outlook for the U.K. improves, and we are looking for a move back towards the 38.2% Fibonacci retracement of the 2009 range (1.5680-90) given the bullish reaction to the BoE’s inflation report. Nevertheless, there remains a risk of seeing a small correction in the exchange rate as the GBPUSD comes up against trendline resistance, but we will look to implement a buy-the-dip strategy for the British Pound should the data prints on tap for the following week further the case for the BoE to normalize monetary policy ahead of schedule. - DS

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