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GBP/USD to Rebound to Succumb to Dovish BoE, Upbeat NFP Report

GBP/USD to Rebound to Succumb to Dovish BoE, Upbeat NFP Report

David Song, Strategist
GBP/USD to Rebound to Succumb to Dovish BoE, Upbeat NFP ReportGBP/USD to Rebound to Succumb to Dovish BoE, Upbeat NFP Report

Fundamental Forecast for British Pound: Neutral

The Bank of England (BoE) interest rate decision is likely to heavily impact the British Pound next week with the central bank schedule to release its updated forecasts, and the near-term rebound in GBP/USD may continue to unravel should the Monetary Policy Committee (MPC) show a greater willingness to further delay the normalization cycle.

The BoE meeting may reveal another 8 to 1 split within the committee as Ian McCafferty sees a risk of overshooting the 2% inflation target in the medium-term, but the majority may continue to endorse a wait-and-see approach as core rate of price growth ‘remains relatively subdued – a consequence of the past appreciation of sterling, weak global inflation and restrained domestic cost growth.’ With the 4Q U.K. Gross Domestic Product (GDP) print highlighting the slowest pace of growth since 2013, the BoE’s quarterly inflation report (QIR) may discourage bets for a rate-hike in 2016 should Governor Mark Carney and Co. curb their economic outlook for the U.K.

In contrast, the Federal Open Market Committee (FOMC) may stay on course to implement higher borrowing-costs over the coming months as the U.S. Non-Farm Payrolls (NFP) report is anticipated to show another 190K expansion in January, and the 2016 voting-members may take a more proactive approaching in preparing households and businesses for higher borrowing-costs especially as the economy approaches ‘full-employment.’ However, a slowdown in Average Hourly Earnings may keep the Fed on the sidelines throughout the first-half of 2016 as it undermines the central bank’s pledge to achieve its price stability mandate, and the next interest rate decision on March 16 may undermine the bullish sentiment surrounding the dollar should the committee endorse a wait-and-see approach.

Nevertheless, the longer-term outlook for GBP/USD remains tilted to the downside as the BoE continues to lag behind its U.S. counterpart, and the near-term rebound in the exchange rate may continue to unravel in the days ahead should we get more of the same from the MPC. At the same time, the Fed may have little choice but to stay committed to its normalization cycle amid the ongoing improvement in the labor market.

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