Fundamental Forecast for British Pound:Neutral
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GBP/USD stands at risk of facing increased volatility in the week ahead as market attention turns to the Federal Reserve’s October 28 interest rate decision, while the U.S. & U.K. are scheduled to release their Gross Domestic Product (GDP) reports for the third-quarter of 2015.
Indeed, the fresh rhetoric coming out of the Federal Open Market Committee (FOMC) may heighten the appeal of the U.S. dollar should the central bank keep the door open for a 2015 rate-hike. Comments reflecting a greater willingness to remove the zero-interest rate policy (ZIRP) may encourage bets for a more aggressive normalization cycle, and market participants may position for a resumption of the long-term bullish trend in the greenback as Chair Janet Yellen remains upbeat on the economy. However, another 9-1 split accompanied by greater concerns regarding the disinflationary environment may drag on interest rate expectations, and the near-term advance in the reserve currency may largely unravel should the Fed show a greater disposition to carry its current policy into 2016.
Meanwhile, the advance U.S. GDP report is expected to show the growth rate climbing an annualized 1.6% following the 3.9% expansion in the second-quarter, and dovish Fed rhetoric paired with a marked slowdown in economic activity may produce headwinds for the dollar as it clouds the outlook for monetary policy. In contrast, the U.K. is projected to grow another 2.4% during the three-months through September, and signs of a more sustainable recovery may keep the Bank of England (BoE) on course to implement higher borrowing-costs especially as board member Kristin Forbes argues interest rates will rise ‘sooner rather than later.’ As a result, the key event risks may heavily impact the outlook for monetary policy, and the pound-dollar may largely consolidate going into the end of October should the developments highlight a tightening race between the BoE & Fed.
Nevertheless, the technical outlook for GBP/USD remains tilted to the downside as the rebound from the monthly low (1.5106) fails to spur a test of the September high (1.5658), with the pair marking multiple failed attempts to close above the 100-Day SMA (1.5490). The lack of momentum to hold above the 1.5500 handle ahead of the last week of October may highlight a near-term topping process in the exchange rate especially as the Relative Strength Index (RSI) largely preserves the bearish formation from back in May.