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GBP Opening Monthly Range Hinges on BoE Vote Count, Inflation Report

GBP Opening Monthly Range Hinges on BoE Vote Count, Inflation Report

2015-07-31 20:05:00
David Song, Currency Strategist
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GBP Opening Monthly Range Hinges on BoE Vote Count, Inflation Report

Fundamental Forecast for British Pound:Neutral

The Bank of England’s (BoE) interest rate decision on August 9 is likely to heavily impact the British Pound and dictate the monthly opening range for GBP/USD as the central bank is set to release the policy statement, the vote-count along with the quarterly inflation report.

The fresh batch of central bank rhetoric may heighten the appeal of the sterling as Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs, and signs of a greater dissent within the Monetary Policy Committee (MPC) may spur a near-term breakout in GBP/USD amid the tightening race with the Federal Reserve to normalize policy. Indeed, the limited commentary following the Federal Open Market Committee’s (FOMC) July 29 interest rate decision suggests that the central bank remains in no rush to raise the benchmark interest rate, and the committee may continue to endorse a wait-and-see approach in the months ahead as Chair Janet Yellen looks for a further improvement in the labor market.

Nevertheless, there’s growing speculation that Martin Weale and Ian McCafferty, the two BoE dissenters in 2014, will push for a rate hike, and we may see the sterling largely outperform against its major counterparts should the committee show a greater willingness to remove the record-low interest rate sooner rather than later. However, another unanimous vote to retain the current policy along with a downward revision in the BoE’s updated economic projections is likely to produce headwinds for the sterling, and a more dovish tone may undermine the near-term rebound in GBP/USD as it fuels bets of seeing the Fed implement a rate hike ahead of its U.K. counterpart.

With that said, GBP/USD may continue to face range-bound prices ahead of the BoE meeting, and the fresh developments coming out of the central bank may set the tone for August as market participants weigh the outlook for monetary policy. In turn, we are still waiting for a break & close above near-term resistance around 1.5630 (38.2% retracement) to 1.5650 (38.2% expansion) to favor a more bullish outlook for the sterling, but a cautious tone from the BoE may drag on the exchange rate and spur a test of support around 1.5330 (78.6% expansion) to 1.5350 (50% retracement). - DS

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