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GBP/USD Risks Larger Post-Fed Advance Amid Narrowing Race With BoE

GBP/USD Risks Larger Post-Fed Advance Amid Narrowing Race With BoE

2015-09-18 22:50:00
David Song, Strategist
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GBP/USD Risks Larger Post-Fed Advance Amid Narrowing Race With BoEGBP/USD Risks Larger Post-Fed Advance Amid Narrowing Race With BoE

Fundamental Forecast for British Pound:Bullish

GBP/USD may continue to retrace the decline from the previous month as the Bank of England (BoE) still anticipates faster inflation later this year, while the Federal Open Market Committee (FOMC) turns increasingly cautious towards the risks posed by a further appreciation in the reserve currency.

There appears to be tightening race to normalize monetary policy as growing number of BoE officials prepare U.K. households and businesses for higher borrowing-costs, and we may see a greater dissent at the next policy meeting on October 8 amid budding concerns of overshooting the 2% target for inflation. As a result, the ‘solid’ recovery accompanied by signs of stronger wage growth may keep the Monetary Policy Committee (MPC) on course to raise its benchmark interest rate in the first-half of 2016, and comments from BoE Deputy Governor Minouche Shafik next week may further boost the appeal of the sterling should the voting-member show a greater willingness to normalize monetary policy sooner rather than later.

In contrast, the dollar stands at risk of face additional headwinds in the days ahead as market participants continue to digest the fresh updates coming out of the Federal Reserve, and the downward revisions to the central bank’s growth, inflation and interest rate projections may further dampen speculation for a 2015 rate-hike as Chair Janet Yellen adopts a more dovish outlook for monetary policy. Even though Chair Yellen sees the disinflationary environment largely attributed to transitory factors, the central bank head appears to have changed her stance on weak energy prices as it now undermines the outlook for price growth and business investment. In turn, another series of mixed data prints may drag on the greenback as it raises the Fed’s scope to retain the zero-interest rate policy (ZIRP) throughout 2015.

With that said, GBP/USD may continue to carve a series of higher highs & lows next week should BoE officials further boost interest rate expectations, while they key data prints coming out of the world’s largest economy may fuel bets for a Fed liftoff in 2016 as market participants look for a contraction in demand for U.S. Durable Goods Orders accompanied by a decline in Non-Defense Capital Goods Orders excluding Aircrafts, a proxy for future business investments.

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