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GBP/USD 2016 Rebound Vulnerable  to Upbeat Fed Testimony

GBP/USD 2016 Rebound Vulnerable to Upbeat Fed Testimony

2016-02-06 00:24:00
David Song, Currency Strategist
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GBP/USD 2016 Rebound Vulnerable  to Upbeat Fed TestimonyGBP/USD 2016 Rebound Vulnerable  to Upbeat Fed Testimony

Fundamental Forecast for British Pound: Neutral

The near-term rebound in GBP/USD may continue to unravel in the week ahead should the Federal Reserve’s semi-annual Humphrey-Hawkins testimony with Chair Janet Yellen highlight a further deviation in the policy outlook.

Indeed, the British Pound avoided the most bearish scenario as Bank of England (BoE) Governor Mark Carney talked down expectations for a further reduction in the benchmark interest rate, but the unanimous vote to retain the current policy may further dampen the appeal of the sterling as the Monetary Policy Committee (MPC) appears to be in no rush to normalize monetary policy. With mixed expectations surrounding the U.K. production figures on tap for next week, a string of dismal data prints may produce headwinds for the sterling as market participants push out bets for a BoE rate-hike.

In contrast, Fed Chair Yellen may largely endorse an upbeat outlook for the U.S. economy as the Non-Farm Payrolls (NFP) report shows sticky wage growth, an unexpected decline in the Unemployment Rate accompanied by a pickup in the participation rate, and the ongoing improvement in the labor market may fuel interest rate expectations especially as the region approaches ‘full-employment.’ Moreover, a rebound in U.S. Retail Sales may also boost the near-term outlook for the greenback as it reinforces Chair Yellen’s expectation for a ‘consumer-led’ recovery and puts increased pressure on the Federal Open Market Committee (FOMC) to implement higher borrowing-costs over the coming months.

In turn, the wait-and-see approach at the BoE accompanied by a more hawkish tone from the Fed Chair may undermine the near-term rebound in GBP/USD, and the pair remains at risk of retaining the downward trend carried over from the summer of 2015 as Governor Carney and Co. continue to lag behind their U.S. counterpart. The opening monthly range will certainly be in focus as the pound-dollar marks a high of 1.4668 in February, with the pair at risk of moving back towards the 2016 low (1.4078) amid the deviating paths for monetary policy.

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