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GBP/USD Rally to Accelerate on Tighten Race Between BoE & FOMC

GBP/USD Rally to Accelerate on Tighten Race Between BoE & FOMC

David Song, Strategist
GBP/USD Rally to Accelerate on Tighten Race Between BoE & FOMC

Fundamental Forecast for British Pound:Bullish

The near-term advance in GBP/USD may gather pace in the days ahead should the fundamental developments coming out of the world’s largest economy fuel bets for a further delay in the Fed’s normalization cycle.

Even though the Federal Open Market Committee (FOMC) remains on course to normalize monetary policy later this year, the central bank runs the risk of preserving its zero-interest rate policy (ZIRP) throughout 2015 should the data prints coming out of the U.S. economy continue to highlight a disinflationary environment. In light of the unexpected slowdown in consumer price growth, a dismal reading for core Personal Consumption Expenditure (PCE) – the Fed’s preferred gauge for inflation – may undermine the FOMC’s commitment to achieve its price stability mandate, and a growing number of central bank officials may adopt a more dovish outlook for monetary policy in an effort to encourage a stronger recovery.

Despite the limited event risk scheduled for the U.K., the pickup in household consumption may highlight and improved outlook for the region and put increased pressure on the Bank of England (BoE) to remove the record-low interest rate as it remains one of the leading drivers of growth and inflation. With spare capacity quickly abating in the U.K., we may see a greater dissent within the Monetary Policy Committee (MPC) over the coming months, and the BoE may face a tightening race with the to normalize monetary policy as the economy gets on a firmer footing.

With GBP/USD retracing 50% of the decline from back in July 2014, the risk for a more delayed Fed liftoff may spur a further advance in the exchange rate, and the inflation prints coming out of the U.S. economy may continue to dampen the appeal of the greenback should the figures fall short of market expectations. - DS

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