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British Pound Likely to Stick to Tight Range, but Watch Key Data

Fundamental Forecast for British Pound: Neutral

The British Pound stuck to its tight trading range versus the US Dollar and failed once again to close above critical resistance. We’ll watch potentially significant UK Consumer Price Index inflation and Retail Sales data releases for any surprises, but a substantial breakout seems unlikely as traders tread softly in the month of August.

The British currency continues to track movements in domestic yields and interest rate expectations, and to that effect it will be important to monitor sharp reactions to the key inflation and retail sales figures. A disappointing Quarterly Inflation Report from the Bank of England severely scaled back expectations that officials would vote to raise interest rates through the foreseeable future.

A Bloomberg News survey shows analysts/economists predict that July CPI data will show prices remained exactly unchanged on a year-over-year basis. The BoE expressly targets an annual inflation rate of 2.0 percent, and the lack of price pressures will leave officials with ample scope to leave monetary policy unchanged through the rest of the year.

It would likely take a substantial surprise out of the Consumer Price Index inflation report to force a meaningful shift in expectations and the GBP itself. And indeed, forex volatility prices remain low for the British Pound, the US Dollar, and major FX counterparts. There’s an outside chance that the upcoming release of US Federal Reserve meeting minutes will force meaningful reactions out of the US currency. Traders currently price in a roughly 50 percent chance the Fed will hike in September, and surprises in official rhetoric could nudge the odds in one direction or the other.

Recent CFTC Commitment of Traders data shows that large speculators remain marginally net-short the GBP/USD. Risks seem weighed to the downside absent major surprises out of upcoming UK economic data and Fed minutes. – DR