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GBP to Face Larger Advance on Hawkish BoE, Stronger UK Wage Growth

GBP to Face Larger Advance on Hawkish BoE, Stronger UK Wage Growth

David Song, Strategist

GBP to Face Larger Advance on Hawkish BoE, Stronger UK Wage Growth

Fundamental Forecast for British Pound: Bullish

The narrowing risk for a Euro-Zone breakup paired with signs of a stronger U.K. recovery should heighten the appeal of the British Pound as the Bank of England (BoE) remains on course to raise the benchmark interest rate off of the record-low.

A Greek deal should keep the Monetary Policy Committee (MPC) on course to normalize monetary policy as Governor Mark Carney sees ‘solid’ growth in the U.K. economy, and the central bank head may continue to prepare households and businesses for higher borrowing-costs as BoE officials are scheduled to testify in front of the House of Commons Treasury Committee next week. At the same time, the fresh batch of central bank rhetoric may highlight a greater dissent within the MPC as a growing number of BoE officials adopt an improved outlook for the region, and the key data prints due out in the days ahead may put increased pressure on the committee to deliver a rate hike in 2015 as the outlook for growth and inflation improves.

Even though the headline reading for the U.K. Consumer Price Index (CPI) is expected to hold flat in June, stickiness in the core rate of inflation may keep the sterling afloat, and market participants may show a more meaningful reaction to the Jobless Claims report as Average Weekly Earnings are projected to expand an annualized 3.0% in May after climbing 2.7% the month prior. A marked pickup in wage growth should raise the BoE’s scope to achieve the 2% inflation target over the policy horizon, and the pound-dollar may continue to retrace the decline from July 2014 amid the tightening race with the Federal Reserve to normalize monetary policy.

With that said, the recent price action in GBP/USD also highlights the risk for a further appreciation in the exchange rate as the pair retains the upward trend carried over from May, and the pound-dollar appears to have carved a near-term low around the 1.5330 region (78.6% Fibonacci retracement) as the Relative Strength Index (RSI) threatens the bearish momentum carried over from the previous month. - DS

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