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British Pound Rally Unlikely to Last for this Key Reason

British Pound Rally Unlikely to Last for this Key Reason

2016-03-12 02:06:00
David Rodriguez, Head of Product
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British Pound Rally Unlikely to Last for this Key ReasonBritish Pound Rally Unlikely to Last for this Key Reason

Fundamental Forecast for British Pound:Bearish

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The British Pound showed further signs of life as it rallied for a second-consecutive week against major FX counterparts. And yet the recent bounce doesn’t change the fact it is the worst-performing G10 currency year-to-date. The prospect of the so-called ‘Brexit’ will likely keep pressure on the UK currency through the foreseeable future, while key events in the week ahead could force significant short-term volatility.

It will be important for Sterling traders to watch for surprises out of the upcoming Bank of England monetary policy decision given the potential for big market moves. A Bloomberg News survey shows economists unanimously predict the BoE will leave its Bank Rate and Asset Purchase Target levels unchanged. Barring a truly shocking result, the focus thus shifts to the official statement to follow the announcement.

Will Monetary Policy Committee officials hint towards further Quantitative Easing given a recent deterioration in credit market conditions? A “bazooka” of monetary policy easing from the European Central Bank arguably increases pressure on their UK counterpart to act in kind. Yet it was just in January when an MPC member voted in favor of raising interest rates, and a sudden shift towards easing would mark a substantive change in direction. We expect the British Pound could weaken further on any ensuing confusion if the BoE statement hints towards further easing.

Traders should otherwise keep an eye on upcoming UK Jobless Claims data results, while a US Federal Reserve interest rate decision could likewise force volatility across global financial markets.

For the British Pound the big-picture trend remains fairly clear—the GBP/USD exchange rate has fallen in 14 out of the past 19 months. The biggest risk remains a British exit (“Brexit”) from the European Union and the uncertainty it represents. Until there is clarity on that front we do not expect a material GBP recovery

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