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Narrowing Race Between BoE/Fed to Fuel GBP/USD Breakout

Narrowing Race Between BoE/Fed to Fuel GBP/USD Breakout

2015-08-21 20:46:00
David Song, Currency Strategist

Narrowing Race Between BoE/Fed to Fuel GBP/USD Breakout

Fundamental Forecast for British Pound:Neutral

The near-term breakout in GBP/USD may gather pace during the last full-week of August should the key speeches by central officials point to a tightening race between the Bank of England (BoE) and the Federal Reserve to normalize monetary policy.

Even though the preliminary U.K. Gross Domestic Product (GDP) report is expected to show a 0.7% expansion in the second-quarter, fresh commentary from BoE Governor Mark Carney and Fed Vice-Chair Stanley Fischer may have greater impact on the near-term outlook for the pound-dollar as market participants turn their attention to the Federal Reserve Economic Symposium in Jackson Hole, Wyoming. The larger-than-expected pickup in the U.K. Consumer Price Index (CPI) may put increased pressure on the BoE to lift the benchmark interest rate off of the record-low, and Governor Carney may take a more aggressive approach in preparing U.K. households and businesses for higher borrowing-costs as the central bank anticipates faster inflation over the remainder of the year.

In contrast, the Fed Minutes from the July 29 interest rate decision suggests that the bar remains high for a September liftoff as the committee highlights a growing number of downside risks to the economic outlook. Indeed, the renewed decline in energy prices may become a growing concern for the committee as it struggles to achieve the 2% target for inflation, and the slowdown in global growth raises the risk for a further delay of the normalization cycle especially as Chair Janet Yellen remains in no rush to remove the zero-interest rate policy (ZIRP). That said, dovish remarks from Mr. Fischer may curb the appeal of the dollar, and the greenback may face additional headwinds ahead of the next interest rate decision on September 17 as market participants push back bets for a shift in Fed policy.

As a result, the fresh rhetoric coming out of the BoE/Fed may largely dictate price action in the week ahead as market participants continue to weigh the outlook for monetary policy. With that said, the recent price developments point to a further advance in GBP/USD as it breaks out of the tight range carried over from July, and the pair may continue to retrace the decline from back in June as it retains the bullish trend carried over from June.

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