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GBPUSD Preserves Broad Range- Has Pound Carved a Top Ahead of BoE?

GBPUSD Preserves Broad Range- Has Pound Carved a Top Ahead of BoE?

2013-08-23 20:00:00
David Song, Strategist
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Forex_GBPUSD_Preserves_Broad_Range-_Has_Pound_Carved_a_Top_Ahead_of_BoE_body_ScreenShot005.jpg, GBPUSD Preserves Broad Range- Has Pound Carved a Top Ahead of BoE?

GBPUSD Preserves Broad Range- Has Pound Carved a Top Ahead of BoE?

Fundamental Forecast for the British Pound: Neutral

The British Pound fell back from a fresh monthly high of 1.5716 even as the preliminary 2Q GDP report showed an upward revision in the U.K. growth rate, and the GBPUSD may continue to consolidate in the week ahead as the pair appears to be carving a top in August. Although the economic docket is expected to show a further improvement in U.K. consumer confidence along with a pickup in private sector credit, Bank of England (BoE) Deputy Governor Charles Bean argued that there’s ‘a long way’ before the central bank starts to tighten monetary policy, and went onto say that the Monetary Policy Committee (MPC) may further embark on quantitative easing as the rise in U.K. yields raises the risk for a protracted recovery.

With BoE Governor Mark Carney scheduled to speak next week, the fresh batch of central bank rhetoric may heavily impact the British Pound ahead of the September 5 meeting, and the sterling may face a larger correction should the central bank head show a greater willingness to expand the balance sheet further. Indeed, Mr. Carney may continue to strike a rather dovish tone for monetary policy amid the persistent slack in the real economy, and the sterling may trade within a broad range over the near to medium-term as the policy outlook remains clouded with high uncertainty.

However, as the MPC anticipates a more broad-based recovery in the second-half of the year, prospects for stronger growth may keep inflation above the 2% target for an extended period of time, and the ‘knock out’ for forward guidance may shore up the sterling on a longer-term scale as it raises the scope of seeing the BoE implement its exit strategy ahead of schedule. Nevertheless, the rally in the GBPUSD could be coming to an end as the pair marks a failed run at the June high (1.5750), and the sterling may trade within a broad range over the near to medium-term as market participants weigh the outlook for monetary policy.

The GBPUSD may face a larger correction next week as the pair failed to mark a close above the 38.2% Fibonacci retracement of the 2009 range, and we may see a move back towards the 61.8% Fib expansion (1.5480-90) as the pound-dollar continues to search for support. However, should the key figure fail to provide a floor for the GBPUSD, a further decline in the exchange rate may threaten the upward trending channel carried over from July, and the sterling may ultimately give back the rebound from 1.4812 should the BoE show a greater willingness to retain its highly accommodative policy stance for an extended period of time. - DS

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