British Pound Breaks Out- BoE Policy Fosters Bullish Outlook

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British Pound Breaks Out- BoE Policy Fosters Bullish Outlook

Fundamental Forecast for British Pound: Bullish

The British Pound broke out of the range carried over from the previous week, with the GBPUSD climbing to a fresh monthly high of 1.5362, and the sterling may continue to retrace the sharp decline from earlier this year as the Bank of England (BoE) maintains a neutral stance for monetary policy. Indeed, the BoE kept the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, but refrained from releasing a policy statement once again as the Monetary Policy Committee sticks to the sidelines.

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In turn, the BoE Minutes due out on April 17 may reveal another 6-3 split within the central bank, and the majority may continue to endorse a neutral policy stance for 2013 as the committee sees a slow but sustainable recovery in Britain. Although the BoE pushed U.K. lenders to raise GBP 25B in fresh capital, Chief Economist Spencer Dale still expects bank lending to pick up this year as the Funding for Lending Scheme continues to work its way through the real economy. Moreover, Standard and Poor’s reaffirmed the AAA credit-rating for the U.K. even as the group held a negative outlook for the region, and the British Pound may continue to track higher in the days ahead as the economic docket for the following week is expected a rebound in business outputs, while the British Retail Consortium’s gauge for retail sales is projected to increase another annualized 1.0% in March. As the pickup in private sector activity raises the outlook for growth and inflation, we may see a growing number of BoE officials adopt a more hawkish tone for monetary policy, and we may see the central bank slowly move away from its easing cycle later this year as the U.K. is expected to avoid a triple-dip recession.

As the GBPUSD climbs back above former support – the 50.0% Fibonacci retracement from the 2009 low to high around 1.2560 – the rebound from the yearly low (1.4830) looks poised to gather pace over the near-term, and we may see a run at the 38.2% retracement (1.5680) as the BoE refrains from expanding the balance sheet further. Indeed, narrowing bets for more quantitative easing instills a bullish outlook for the British Pound, but we may see a growing number of investors treat the sterling as a safe-haven amid the ongoing turmoil in the euro-area. - DS

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