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GBP/USD to Carve Higher-Low on Dovish FOMC

GBP/USD to Carve Higher-Low on Dovish FOMC

David Song, Strategist
GBP/USD to Carve Higher-Low on Dovish FOMC

Fundamental Forecast for Pound:Bullish

The GBP/USD faced a larger correction going into the end of July as the Bank of England (BoE) Minutes showed a unanimous vote to retain the current policy, but the fundamental outlook continues to generate a bullish bias for the British Pound as central bank Governor Mark Carney sees the spare capacity in the U.K. economy being used up faster than expected.

It seems as though the Monetary Policy Committee (MPC) is moving closer to normalizing monetary policy as ‘some’ members see less risk of a rate hike derailing the economic recovery, and it appears as though a growing number of central bank officials are showing a greater willingness to raise the benchmark interest rate later this year as the underlying momentum in the U.K. economy looks ‘more assured.’ Despite the lackluster 2Q U.K. GDP print, the International Monetary Fund (IMF) continued to raise its economic forecast for the region, with the group now calling for a 3.2% expansion in 2014 versus an initial forecast for a 2.9% rise.

As a result, the BoE’s Inflation report due out on August 13 may further boost the appeal of the sterling should the central bank adopt a more hawkish tone for monetary policy, and the GBP/USD looks poised to retain the bullish trend carried over from the previous year as the Federal Reserve remains reluctant to move away from its highly accommodative policy stance.

With that said, we are still looking for a higher-low in the GBP/USD as price continues to hold above channel support, and the Federal Open Market Committee (FOMC) interest rate decision on July 30 may serve as the fundamental catalyst to spark a resumption of the bullish trend should Chair Janet Yellen continue to highlight a dovish tone for U.S. policy. - DS

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