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Stronger UK Recovery to Fuel Bullish GBP Outlook- BoE Hike in August?

Stronger UK Recovery to Fuel Bullish GBP Outlook- BoE Hike in August?

David Song, Strategist

Stronger UK Recovery to Fuel Bullish GBP Outlook- BoE Hike in August?

Fundamental Forecast for British Pound:Neutral

The fundamental developments coming out of the U.K. economy may spark another near-term rally in GBP/USD should the data prints boost expectations of seeing a Bank of England (BoC) rate hike in 2015.

A further expansion in U.K. Mortgage Applications paired with a meaningful upward revision in the final 1Q Gross Domestic Product (GDP) report may heighten expectations for a stronger recovery, and we may see a growing number of BoE officials adopt a more hawkish tone for monetary policy as the region gets on a more sustainable path. The fading margin of slack in the real economy may encourage a larger dissent within the Monetary Policy Committee (MPC) as board member Martin Weale sees scope to raise the benchmark interest rate as early as August, and Governor Mark Carney may prepare U.K. household and business for an imminent rise in borrowing-costs as the central bank head anticipates stronger growth and inflation in materialize in the second-half of the year.

At the same time, the BoE outlook remains at odds with the Federal Reserve as Janet Yellen and Co. remains on course to normalize monetary policy later this year, and market participants may increase bets for a September liftoff as the U.S. Non-Farm Payrolls (NFP) report is expected to show another 230K expansion in job growth. However, with Average Hourly Earnings projected to hold at an annualized 2.3% in June, subdued wages may become a growing concern for the Federal Open Market Committee (FOMC) as it undermines the central bank’s scope to achieve the 2% target for inflation. With the central banks in the U.S. & U.K. standing ready to shift gears, the outlook for GBP/USD largely hinges on the key data prints coming of both regions are likely to play an increased role in driving near-term volatility in the exchange rate amid the narrow race to remove monetary support.

With that said, the pound-dollar may face range-bound prices going into July, and signs of a stronger U.K. recovery may heighten the appeal of the sterling, while another series of mixed U.S. data prints may continue to drag on Fed expectations especially as the central bank curbs its economic projections for 2015. - DS

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