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GBP/USD to Face Relief Rally on Upbeat U.K. PMI, Dovish Fed Rhetoric

GBP/USD to Face Relief Rally on Upbeat U.K. PMI, Dovish Fed Rhetoric

2016-04-02 23:33:00
David Song, Currency Strategist
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GBP/USD to Face Relief Rally on Upbeat U.K. PMI, Dovish Fed RhetoricGBP/USD to Face Relief Rally on Upbeat U.K. PMI, Dovish Fed Rhetoric

Fundamental Forecast for British Pound: Neutral

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With second-tier data on tap for the week ahead, the British Pound may continue to consolidate ahead of the next Bank of England (BoE) interest-rate decision on April 14, but fresh rhetoric from Fed officials may generate a near-term rebound in GBP/USD as Chair Janet Yellen endorses a more dovish outlook for monetary policy.

A pickup in the U.K. Purchasing Manager Indices may boost the appeal of the sterling and highlight an improved outlook for the region following the unexpected upward revision in the 4Q Gross Domestic Product (GDP) report. With the economy posting an annualized 2.1% rate of growth during the last three-months of 2015, the BoE may adopt a more hawkish tone over the coming months as the central bank remains adamant that the next move will be to normalize monetary policy. Even though the Monetary Policy Committee (MPC) is widely expected to retain its current policy ahead of the U.K. Referendum in June, a series of positive data prints may generate a near-term rebound in the sterling as it boosts interest-rate expectations.

On the other hand, comments from Boston Fed President Eric Rosengren, Minneapolis Fed President Neel Kashkari, Chicago Fed President Charles Evans, Cleveland Fed President Loretta Mester, Dallas Fed President Robert Kaplan, Kansas City Fed President Esther George and Chair Janet Yellen should the central bank officials try to buy more time. Even though Fed officials forecast two rate-hikes for 2016, the central bank appears to be in no rush to further normalize monetary policy amid the external risks surrounding the U.S. economy. Indeed, Chair Yellen may increase her efforts to tame market speculation as the central bank head adopts a more dovish tone and shows greater concerns surrounding the downward tilt in inflation expectations.

With that said, GBP/USD may enjoy a relief rally during the first full-week of April as market participants continue to gauge the outlook for monetary policy, and a further commitment by Fed officials to ‘gradually’ remove the accommodative policy stance may produce near-term headwinds for the greenback as it dampens bets for a rate-hike in the first-half of 2016. In turn, GBP/USD may work its way back towards the top of its current range as the pair remains off of the March low (1.3903) and holds above the 1.4000 handle..

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