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British Pound to Face Limited Correction on Stronger U.K. Recovery

British Pound to Face Limited Correction on Stronger U.K. Recovery

David Song, Strategist
British_Pound_to_Face_Limited_Correction_on_Stronger_U.K._Recovery_body_gbp10112013.png, British Pound to Face Limited Correction on Stronger U.K. Recovery

British Pound to Face Limited Correction on Stronger U.K. Recovery

Fundamental Forecast for the British Pound: Neutral

The British Pound struggled to maintain the bullish trend dating back to July even as the Bank of England (BoE) retained its current policy at the October meeting, but the sterling may trade on a firmer footing next week should the fundamental developments coming out of the U.K. encourage the central bank to implement its exit strategy ahead of scheduled.

It seems as though there was another unanimous vote within the Monetary Policy Committee as the central bank refrained from releasing a policy statement, and the BoE Minutes due out on October 23 may sound more hawkish this time around as the U.K. recovery gather pace.

Ahead of that, a further slowdown in the U.K. Consumer Price Index may prompt a more meaningful correction in the GBPUSD, but another 25.0K decline in Jobless Claims along with a rebound in Retail Sales may limit the downside risk for the British Pound as the stronger recovery heightens the outlook for inflation. As the pickup in economic activity raises the risk of see above-target price growth for a prolonged period of time, the BoE may increase its efforts to achieve the 2% target for inflation, and a more material shift in the policy outlook may spur a run at the 2013 high (1.6341) as the central bank appears to be slowly moving away from its easing cycle.

In turn, the British Pound may face a limited correction as the GBPUSD appears to be finding near-term support around 1.5910-20, the 23.6% Fibonacci retracement from the July advance, and the sterling may ultimately carve out a higher low ahead of the BoE Minutes should the data coming out of the U.K. continue to raise the outlook for growth and inflation. - DS

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