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GBP/USD Needs Greater BoE Dissent to Breakout of Bearish Trend

GBP/USD Needs Greater BoE Dissent to Breakout of Bearish Trend

2014-08-30 01:51:00
David Song, Currency Strategist
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GBP/USD Needs Greater BoE Dissent to Breakout of Bearish Trend

Fundamental Forecast for Pound:Neutral

The GBP/USD may continue to trade in a narrow range ahead of the Bank of England (BoE) interest rate decision on September 4 amid the failed attempts to close above the 1.6600 handle.

Indeed, the British Pound may face additional headwinds ahead of the policy meeting as the economic docket for the U.K. is expected to show a slowdown in private-sector lending, and a series of dismal data prints may keep the central bank on the sidelines as Governor Mark Carney persistently highlights the ongoing slack in the real economy.

There is a risk of seeing a limited reaction to the interest rate decision should the Monetary Policy Committee (MPC) refrain from releasing a policy statement, and the BoE Minutes due out on September 17 may continue to show a 7-2 split as Ben Broadbent retains a rather dovish outlook for monetary policy. Nevertheless, Credit Suisse Overnight Index Swaps are showing growing bets for higher interest rates as market participants now see the benchmark interest rate climbing by at least 50bp over the next 12-months, and the fresh batch of central bank rhetoric may continue to prop up interest rate expectations should the committee show a greater willingness to normalize monetary policy sooner rather than later.

With that said, the Relative Strength Index (RSI) on the GBP/USD suggests that a near-term bottom is taking shape as it threatens the bearish momentum from earlier this month, but the sterling remains vulnerable to a further decline as it retains the downward trending channel carried over from July. As a result, we would like to see a close above the 1.6600 handle for confirmation as well as conviction for a move higher, and the BoE meeting may serve as the fundamental catalyst to trigger a topside move in the GBP/USD should the central bank adopt a more hawkish tone for monetary policy.

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