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British Pound Turns Corner on UK Elections – Can it Break Higher?

Fundamental Forecast for British Pound:Neutral

The British Pound thundered higher as a surprising UK General Election result removed a great deal of political uncertainty and encouraged traders to shed short positions. Focus now turns from politics to traditional currency movers ahead of a potentially significant Bank of England Quarterly Inflation Report due in the week ahead.

Recent CFTC Commitment of Traders data showed that large speculators remained heavily short the GBP/USD just days ahead of the highly-anticipated UK General Election. And for arguably good reason—election polls suggested the results would bring extended political gridlock and uncertainty. Yet the final result went well beyond anything traders expected and the Sterling surged. A sharp drop in GBP volatility prices suggests traders fear far less uncertainty for the Sterling.

Whether or not the GBP continues higher will likely depend on the Bank of England’s upcoming Quarterly Inflation Report. The GBP/USD continues to track interest rate differentials, and current market estimates show that traders expect the BoE will raise interest rates through the end of Q3, 2016. The US Federal Reserve seems likely to move much sooner, and this in itself boosts the Greenback versus the Sterling. Yet traders should note the potential for a relatively hawkish shift from the BoE Monetary Policy Committee members.

It seems as though the British Pound has turned the corner after surviving a potentially contentious UK general election. Yet further gains are far from certain; it will be important to track the coming week’s BoE statements to gauge the likelihood of further GBP strength.