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British Pound to Lose Further Unless the FTSE 100 Bounces Sharply

British Pound to Lose Further Unless the FTSE 100 Bounces Sharply

David Song, Strategist
British Pound to Lose Further Unless the FTSE 100 Bounces SharplyBritish Pound to Lose Further Unless the FTSE 100 Bounces Sharply

Fundamental Forecast for British Pound: Bearish

Even though the Bank of England (BoE) meeting revealed another 8 to 1 split within the central bank, the British Pound may face additional headwinds next week and extend the decline from earlier this month should the fundamental developments coming out of the U.K. drag on interest rate expectations.

The U.K. Consumer Price Index (CPI) is expected to show the headline reading advancing an annualized 0.2% in December, with the core rate of inflation seen steady at 1.2% but, a marked slowdown in Average Weekly Earnings may put increased pressure on the Monetary Policy Committee (MPC) to further delay the normalization cycle as the central bank struggles to achieve its 2% target for price growth. With BoE officials highlighting the downside risk for growth and inflation, signs of a slower recovery may further dampen the appeal of the sterling as Governor Mark Carney appears to be in no rush to lift the benchmark interest rate off of the record-low.

At the same time, the U.S. CPI report may also fuel a further decline in GBP/USD as the headline and core rate of inflation is anticipated to pick up during the same period, and signs of rising price pressures may prompt the Fed implement another rate-hike in the first-half of 2016 as Chair Janet Yellen remains upbeat on the economy. However, the ongoing decline in energy prices may become a growing concern for the Federal Open Market Committee (FOMC) as central bank hawk James Bullard warns that the weakness may not be transitory and start to impact real economy. In turn, a dismal inflation report may spur a shift in the Fed’s language and the committee may sound more cautious at the January 27 interest rate decision as it undermines the central bank’s scope to achieve its dual mandate for full-employment and price stability.

Nevertheless, the longer-term outlook for GBP/USD remains tilted to the downside with the BoE largely retaining a wait-and-see approach, while the Fed appears to be on course to implement higher borrowing-costs over the coming months. The Relative Strength Index (RSI) on GBP/USD suggests that the near-term selloff may have continue to gather pace in the days ahead especially as the oscillator pushes deeper into oversold territory and approaches the lowest level since September 2014.

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