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British Pound at Important Risk of Reversal Ahead of Key Data

Fundamental Forecast for Pound:Neutral

The British Pound finished the week almost exactly where it began, but key UK employment data releases on the calendar promise bigger moves in the week ahead.

Lack of action from the Bank of England kept the Sterling in a tight range versus the US Dollar, while extensive action from the European Central Bank actually forced the Euro/GBP exchange rate to its lowest since 2012. Key technical indicators suggest that the British Pound may nonetheless be at risk of declines versus the Euro and US Currency. A news-driven catalyst could come on upcoming UK Jobless Claims and Unemployment Rate data.

Analysts expect that the UK jobless rate fell to fresh five-year lows in April, and continued outperformance in the labor market will put further pressure on the Bank of England to raise rates through the foreseeable future.

Indeed it was an important reversal in UK interest rate expectations that pushed the Sterling to fresh multi-year highs. Thus any significant disappointments in top-tier economic data could force GBP pullbacks. The bullish forecasts for the key figures leave risks to the downside for the British currency.

Those waiting for substantial GBP volatility may nonetheless need to wait for a change in broader market conditions; 1-week volatility prices on GBPUSD options have fallen near record lows. We may look to sell any important rallies as we see clear risk of a larger GBP turn lower. –DR