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GBP/USD Advances Fizzles Ahead of U.K. Election- 1.5000 on Radar

GBP/USD Advances Fizzles Ahead of U.K. Election- 1.5000 on Radar

David Song, Strategist

Fundamental Forecast for British Pound:Neutral

Headlines surrounding the U.K. election are likely produce increased volatility for GBP/USD, but the uncertainties clouding the fiscal outlook may only act as a near-term driver for the British Pound as the Bank of England (BoE) remains on course to normalize monetary policy.

A hung parliament is likely to produce near-term headwinds for the British Pound, and the GBP/USD may continue to give back the rebound from April (1.4564) as the pair struggles to retain the series of higher highs & lows ahead of the election. On the other hand, the formation of a coalition government may largely undermine the bearish sentiment surrounding the sterling, and market participants may put increase emphasis on the BoE’s quarterly inflation report due out on May 13 as Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs.

Despite the weaker-than-expected 1Q Gross Domestic Product (GDP) report, the BoE may strike a more hawkish tone this time around as the sterling effect raises the risk for ‘a faster pickup in inflation,’ and an upward revision in the central bank’s price growth forecast may boost the appeal of the sterling as market participants ramp up interest rate expectations. With that said, the monetary policy outlook may continue to act as the biggest fundamental driver as market participants speculate on the BoE’s normalization cycle, and a material shift in the forward-guidance may generate a more bullish course for GBP/USD as the central bank reiterates that the next policy move will most likely be a rate-hike.

Nevertheless, the failed attempt to test the February high (1.5551) may keep GBP/USD capped going into the first full-week of May, and the failure to retain the bullish structure from April certainly raises the risk of seeing a further decline going into the election. In turn, former resistance around the 1.5000 handle will come on the radar as the pound-dollar searches for near-term support.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.