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GBP Risks Further Losses on Slowing U.K. CPI- 1.6400 Remains Critical

GBP Risks Further Losses on Slowing U.K. CPI- 1.6400 Remains Critical

David Song, Strategist
GBP-Risks-Further-Losses-on-Slowing-U.K.-CPI--1.6400-Remains-Critical_body_Picture_5.png, GBP Risks Further Losses on Slowing U.K. CPI- 1.6400 Remains Critical

Fundamental Forecast for Pound:Bullish

The British Pound may face a larger correction in the week ahead as the headline reading for U.K. inflation is expected to narrow to an annualized 1.7% in February, but we will retain a constructive view for the GBPUSD as the Bank of England (BoE) sees a ‘broadening’ recovery in 2014.

A further slowdown in U.K. price growth may limit the BoE’s scope to move away from its easing cycle as Governor Mark Carneysees the spare capacity in the U.K. economy slight above 1.5%, and a dismal CPI print may push the GBPUSD back towards the 1.6400 handle as the pair continues to search for support.

Nevertheless, the BoE Minutes suggests that the central bank will continue to prepare U.K. households for an imminent rise in the benchmark interest rate amid the stronger recovery, and it still seems as though the Monetary Policy Committee (MPC) will do little to halt the advance in the British Pound as it helps to balance the risks surrounding the region. With that said, the policy outlook should help to limit the downside risk for the sterling, and we may see a growing number of central bank officials push to normalize monetary policy sooner rather than later as former Deputy Governor Charles Bean argues that the BoE may wind-down its balance sheet by allowing its Gilt holdings to mature.

As a result, the 1.6400 handle may serve as key support as we have a handful of Fibonacci levels coming in around the figure, and we will revert back to the ‘buy the dip’ approach once the GBPUSD finds support amid the series of higher highs & higher lows in the exchange rate. - DS

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