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GBP Poised to Clear 1.6400 as BoE Removes FLS- Key Themes for 2014

GBP Poised to Clear 1.6400 as BoE Removes FLS- Key Themes for 2014

David Song, Strategist
GBP_Poised_to_Clear_1.6400_as_BoE_Removes_FLS-_Key_Themes_for_2014_body_Picture_1.png, GBP Poised to Clear 1.6400 as BoE Removes FLS- Key Themes for 2014

GBP Poised to Clear 1.6400 as BoE Removes FLS- Key Themes for 2014

Fundamental Forecast for the British Pound: Bullish

The bullish sentiment surrounding the British Pound may gather pace in December should the Bank of England (BoE) continue to show a greater willingness to implement its exit strategy ahead of schedule.

Indeed, the BoE interest rate decision on tap for December 5 may turn out to be a non-event should the central bank refrain from releasing a policy statement, but we may get some fresh updates in regards to the Funding-for-Lending Scheme (FLS) as the Monetary Policy Committee (MPC) plans to remove the non-standard measure for 2014. With that said, key data prints coming out ahead of the BoE may ultimately drive GBPUSD volatility next week, and a slew of positive developments should continue to limit the downside for the sterling as the BoE starts to move away from its easing cycle.

Nevertheless, it seems as though the MPC is making it increasingly clear that the stronger-than-expected recovery will present a larger shift in the policy outlook, and Governor Mark Carney may sound increasingly hawkish next year as the pickup in growth raises the risk of seeing a prolonged period of above-target inflation. In light of the recent decision to remove the FLS, it appears as though Governor Carney is becoming increasingly concerned about the spillover effects (rising home prices) from the highly accommodative policy stance, and the central bank head may ultimately favor a further appreciation in the U.K. exchange rate as it helps to achieve the 2% target for price growth.

The technical outlook for the GBPUSD remains constructive as the bullish momentum in the daily Relative Strength Index (RSI) gathers pace, and we may see a more meaningful move at 1.6400 (61.8% Fibonacci expansion) to 1.6420 (1.618% Fibonacci expansion) should the fundamental developments further the BoE’s case to normalize monetary policy ahead of schedule. In turn, we will retain our game plan to buy dips in the pound-dollar, but we could be looking for a correction (higher low) before the end of the year as the RSI approaches overbought territory. - DS

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