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GBP/USD Rebound to Succumb to Dovish BoE Testimony, Strong US GDP

GBP/USD Rebound to Succumb to Dovish BoE Testimony, Strong US GDP

David Song, Strategist
GBP/USD Rebound to Succumb to Dovish BoE Testimony, Strong US GDPGBP/USD Rebound to Succumb to Dovish BoE Testimony, Strong US GDP

Fundamental Forecast for British Pound:Bearish

GBP/USD extended the rebound from earlier this month as the Federal Open Market Committee (FOMC) Minutes warned of a potential three-way split within the central bank, but the pound-dollar may struggle to hold its ground in the week ahead should the Bank of England (BoE) show a greater willingness to further delay its normalization cycle.

With the BoE scheduled to testify on its quarterly inflation report next week, the fresh batch of central bank rhetoric may dampen the appeal of the sterling should Governor Mark Carney highlight a more neutral outlook for monetary policy. Even though the preliminary U.K. Gross Domestic Product (GDP) report is expected to show the economy growing an annualized 2.3%, the disinflationary environment may continue to generate an 8 to 1 split within the Monetary Policy Committee (MPC) as the central bank anticipates price growth to hold below 1% until Spring 2016. In turn, the BoE may make further attempts to buy more time as the majority remains in no rush to lift the benchmark interest rate off of the record-low.

In contrast, an upward revision in the U.S. GDP print may fuel expectations for a December FOMC rate-hike as the central bank remains upbeat on the economy, and signs of a stronger recovery may boost the appeal of the greenback as market participants anticipate the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, to uptick to an annualized 1.4% from 1.3% in September. Sticky price growth accompanied by a 2.1% expansion in the growth rate may keep the Fed on course to remove the zero-interest rate policy (ZIRP) in 2015 as the U.S. economy approaches full-employment, while Chair Janet Yellen remains confident in achieving the 2% inflation target over the policy horizon.

As a result, the long-term outlook for GBP/USD remains tilted to the downside as the Fed is widely expected to shift gears ahead of its U.K. counterpart, and the pair may largely fail to retain the rebound from the monthly low (1.5026) as market participants push out bets for a BoE rate-hike. Moreover, the advance from the April low (1.4565) may continue to unravel over the coming weeks as Fed Funds Futures show a 68% probability for a rate-hike at the December 16 interest rate decision.

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