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Post-Fed GBP/USD Rebound at Risk on Dovish BoE, Soft Inflation Report

Post-Fed GBP/USD Rebound at Risk on Dovish BoE, Soft Inflation Report

David Song, Strategist
Post-Fed GBP/USD Rebound at Risk on Dovish BoE, Soft Inflation ReportPost-Fed GBP/USD Rebound at Risk on Dovish BoE, Soft Inflation Report

Fundamental Forecast for British Pound:Neutral

With GBP/USD largely reversing the decline following the Federal Open Market Committee’s (FOMC) policy meeting, the pair may continue to face range-bound prices in the week ahead as market attention turns to the Bank of England (BoE) interest rate decision on November 3.

Despite the slew of data prints coming out of the U.K., the fresh commentary coming out of the BoE may play the greatest role in driving near-term price action for the sterling as market participants continue to weigh the outlook for monetary policy. Even though the BoE is widely anticipated to keep the benchmark interest rate at the record-low of 0.50%, the ‘Super Thursday’ event in the U.K. is likely to spur increased volatility in the pound-dollar as the central bank is also scheduled to release its updated quarterly Inflation Report. Another 8-1 split within the Monetary Policy Committee (MPC) accompanied by a downward revision in the BoE’s growth/inflation forecast may drag on the sterling and produce a near-term decline in GBP/USD especially as the BoE sees price growth holding below 1% until Spring 2016. However, a greater dissent within the central bank may heighten the appeal of the British Pound and push the pound-dollar to further retrace the decline from back in September as Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs.

At the same time, we will also closely monitor the fresh batch of central bank rhetoric coming out of the Federal Reserve as Chair Janet Yellen, Vice-Chair Stanley Fischer, Governor Lael Brainard, Governor Daniel Tarullo, New York Fed President William Dudley, Atlanta Fed President Dennis Lockhart and St. Louis Fed President James Bullard are all scheduled to speak in the week ahead. With Fed Funds Futures now pricing a 50% probability for a rate hike at the December meeting, comments highlighting a greater willingness to remove the zero-interest rate policy (ZIRP) in 2015 may continue to limit the topside for GBP/USD as market participants anticipate the Fed to raise its benchmark interest rate ahead of its U.K. counterpart. In turn, hawkish remarks from Fed officials paired with a more neutral tone from the BoE may produce headwinds for GBP/USD as the pair appears to have carved a near-term top.

Even though GBP/USD largely preserves the opening monthly range for October, the failed attempts to close above the 100-Day SMA (1.5483) may produce range-bound conditions going into first full-week of November, but the risk remains tilted to the downside as the Relative Strength Index (RSI) largely preserves the bearish formation from back in May. With that said, the downside targets remain in focus until GBP/USD breaks out of the downward momentum from earlier this year.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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