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British Pound Shows Signs of Life – Next Week Could be Big

British Pound Shows Signs of Life – Next Week Could be Big

David Rodriguez, Head of Product


Fundamental Forecast for British Pound: Bullish

A volatile week of FX trading pushed the British Pound to fresh six-month lows versus the US Dollar, but a late reversal suggests that the GBP/USD ‘Pounding’ may soon come to an end. We’ll look to a busy UK economic calendar to drive near-term moves in the Sterling.

Traders will keep a close eye on an upcoming Bank of England monetary policy decision and scheduled central bank commentary as catalysts for further British Pound volatility. The Bank of England is very widely expected to leave interest rates and its quantitative easing measures unchanged at its December 10 meeting, and the bank does not release meaningful post-decision commentary following inaction. Thus we’ll look to the release of minutes from the BoE Financial Policy Committee’s November meeting as well as planned public speeches from Governor Mark Carney on December 7th and 11th for clues on the future of UK monetary policy.

The key question is simple: will the Bank next move to raise interest rates and, if so, when? A surprising result from the past week’s European Central Bank interest rate decision had a similarly surprising effect on Bank of England rate expectations; the ECB failed to cut interest rates as much as traders had priced in. An immediate jump in broader Euro Zone yields helped the benchmark 2-year UK Government bond yield to its largest single-day gain in over two months. And just as significantly, GBP interest rate futures now predict that the BoE will raise rates a full month sooner than previously expected.

It seems unlikely that Bank of England Governor Carney will admit that ECB inaction increases pressure on the UK central bank, but any hints of a hawkish shift could boost the British Pound further off of recent lows versus the US Dollar. And indeed a reversal off of key GBP/USD technical support levels suggests that the pair may continue higher.

It could be another important week for the Sterling, but traders should likewise note that trading conditions may deteriorate into the final weeks of the year. Traders should likely avoid using excess leverage and look to employ smaller position sizes given appreciable financial risks ahead.

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