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GBP/USD Rebound at Risk as BoE Speaks on U.K. Referendum

GBP/USD Rebound at Risk as BoE Speaks on U.K. Referendum

2016-03-04 22:48:00
David Song, Strategist
GBP/USD Rebound at Risk as BoE Speaks on U.K. ReferendumGBP/USD Rebound at Risk as BoE Speaks on U.K. Referendum

Fundamental Forecast for British Pound: Bearish

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After posting the first five-consecutive days of advances since June, GBP/USD stands at risk facing near-term headwinds should Bank of England (BoE) officials endorse a wait-and-see approach ahead of their next interest rate decision on March 17.

With BoE Governor Mark Carney and Co. schedule to speak on the U.K.’s EU-membership on March 8, the fresh comments coming out of the Parliament hearing may dampen the appeal of the sterling should the central bank show a greater willingness to further delay its normalization cycle. Indeed, the Monetary Policy Committee (MPC) may keep the benchmark interest rate at the record-low throughout 2016 as the economic outlook for the region becomes increasingly clouded with high uncertainty. As a result, the near-term rebound in Cable may largely unravel over the coming days should the BoE curb market expectations for a rate-hike in 2016.

At the same time, key speeches by Fed Vice-Chair Stanley Fischer and Governor Lael Brainard may also drag on GBP/USD as the Federal Open Market Committee (FOMC) continues to prepare households and businesses for higher borrowing-costs, and the bearish trend in GBP/USD may reassert itself especially as the U.S. economy approaches ‘full-employment.’ The 242K expansion in U.S. Non-Farm Payrolls (NFP) accompanied by the larger-than-expected pickup in the Labor Force Participation Rate may put increased pressure on the FOMC to further normalize monetary policy over the coming months as Chair Janet Yellen remains confident in achieving the 2% inflation-target over the policy horizon.

With that said, the broader outlook for GBP/USD remains tilted to the downside as the BoE lags behind its U.S. counterpart, and the pair may continue to carve a long-term series of lower highs & lows as the threat of an EU exit dampens the fundamental outlook for the U.K.

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