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GBP/USD 2015 Rebound to Unravel Further as BoE Lags Behind Fed

GBP/USD 2015 Rebound to Unravel Further as BoE Lags Behind Fed

David Song, Strategist
GBP/USD 2015 Rebound to Unravel Further as BoE Lags Behind FedGBP/USD 2015 Rebound to Unravel Further as BoE Lags Behind Fed

Fundamental Forecast for British Pound:Bearish

GBP/USD stands at risk of extended the decline from the beginning of the month should the key developments coming out of the U.K./U.S. largely boost speculation for the Federal Open Market Committee (FOMC) to normalize monetary policy ahead of the Bank of England (BoE).

The ongoing 8-1 split accompanied by the more dovish tone struck at the BoE’s October 5 interest rate decision suggests that the central bank remains in no rush to implement higher borrowing-costs, and the British Pound may continue to underperform in the week ahead should the fresh comments from Monetary Policy Committee (MPC) members Jon Cunliffe and Andy Haldane further push out bets for a rate-hike. With that said, the U.K. labor report may offer the sterling little assistance as claims for unemployment benefits are projected to increase another 1.4K in October while wage growth is expected to slow to an annualized 2.6% from 2.8% during the same period, and data points highlighting a slower recovery may keep the BoE on the sidelines over the near to medium-term as Governor Mark Carney and. Co continue to gauge the external risks surrounding the U.K. economy.

In contrast, key speeches by Fed Chair Janet Yellen, Vice-Chair Stanley Fischer, Governor Daniel Tarullo, San Francisco Fed President John Williams, Boston Fed President Eric Rosengren, St. Louis Fed President James Bullard, Richmond Fed President Jeffrey Lacker, Chicago Fed President Charles Evans, New York Fed President William Dudley and Cleveland Fed President Loretta Mester may heighten the appeal of the dollar as central bank officials remain upbeat on the economy and keep the door open for a 2015 liftoff, and another 0.3% expansion in U.S. retail sales paired with a pickup in the U. of Michigan confidence survey may fuel expectations for a December rate-hike as they encourage and improved outlook for growth and inflation.

With Fed Funds Futures pricing a 70% probability for higher borrowing-costs at the end of the year, GBP/USD may continue to give back the rebound from the April low (1.4565) as the pair fails to hold above the May low (1.5088) following the U.S. Non-Farm Payrolls (NFP) report. The 1.5000 handle may offer psychological support as the BoE largely remains on course to move away from the record-low interest rate, but the long-term outlook for GBP/USD remains tilted to the downside as still anticipate the Fed to shift gears ahead of its U.K. counterpart.

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