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GBP/USD to Face Larger Advance on Lackluster Fed Rhetoric

GBP/USD to Face Larger Advance on Lackluster Fed Rhetoric

2016-04-30 00:37:00
David Song, Currency Strategist
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GBP/USD to Face Larger Advance on Lackluster Fed RhetoricGBP/USD to Face Larger Advance on Lackluster Fed Rhetoric

Fundamental Forecast for GBP: Neutral

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The slew of fundamental developments coming out of the U.S. economy may play a larger role in driving GBP/USD volatility especially as the U.K. docket remains fairly light for the first full week of May.

Market participants may largely ignore the series of U.K. Purchasing Manager Indices (PMI) as the EU referendum clouds the economic outlook for the region, but the near-term correction in the British Pound may gather pace in the month ahead as the Bank of England (BoE) continues to argue that the next move will be to normalize monetary policy. Even though the Monetary Policy Committee (MPC) remains in no rush to lift the benchmark interest rate off of the record-low, signs of a ‘solid’ recovery in the U.K. may put increased pressure on the BoE to implement a rate-hike sooner rather than later.

At the same time, more of the same from New York Fed President William Dudley, Atlanta Fed President Dennis Lockhart, San Francisco Fed President John Williams, Minneapolis Fed President Neel Kashkari, St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan may dampen the appeal of the greenback as the central bank once again votes 9 to 1 to retain the current policy in April. Nevertheless, another 200K expansion in U.S. Non-Farm Payrolls (NFP) may put increased pressure on the Federal Open Market Committee (FOMC) to implement higher borrowing costs at the June meeting as the world’s largest economy approaches ‘full-employment.’

With that said, GBP/USD may make a more meaningful attempt to break out of the downward trend carried over from last August especially as the Relative Strength Index (RSI) preserves the bullish formation from earlier this year. A close above near-term resistance around 1.4620 (50% expansion) to 1.4660 (50% retracement) may fuel a further advance in the exchange rate, with the next topside region of interest coming in at 1.4800 (61.8% retracement).

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