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GBP/USD Rebound Vulnerable to Dovish BoE Minutes, Slowing 3Q U.K. GDP

GBP/USD Rebound Vulnerable to Dovish BoE Minutes, Slowing 3Q U.K. GDP

David Song, Strategist
GBP/USD Rebound Vulnerable to Dovish BoE Minutes, Slowing 3Q U.K. GDP

Fundamental Forecast for Pound:Neutral

The British Pound may face additional headwinds in the week ahead should the fundamental developments coming out of the U.K. drag on interest rate expectations.

Indeed, Bank of England (BoE) Chief Economist Andrew Haldane warned ‘interest rates could remain lower for longer’ amid the uncertainly surrounding the economic outlook, and the central bank may look to preserve the highly accommodative policy stance for an extended period of time especially as the Euro-Zone, the U.K.’s largest trading partner, faces a growing risk of slipping back into recession.

As a result, the BoE Minutes are widely expected to show another 7-2 split, with Martin Weale and Ian McCafferty still voting against the majority, but the policy statement may highlight a more dovish tone for monetary policy as the headline reading for U.K. inflation slows to an annualized 1.2% in September to mark the lowest reading since 2009. At the same time, the 3Q Gross Domestic Product (GDP) report may undermine the BoE’s expectations for a faster recovery as the growth rate is projected to expand 0.7% after rising 0.9% during the three-months through June, and a marked slowdown in the real economy may generate fresh monthly lows in GBP/USD as market participants scale back bets of seeing higher borrowing costs in the U.K.

Nevertheless, the technical outlook highlights a more meaningful recovery for GBP/USD as the Relative Strength Index (RSI) breaks out of the bearish momentum carried over from the end of June, and we will continue to keep a close eye on the ongoing divergence in the oscillator amid the string of lower highs in price. - DS

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