Pound Overbought on Upbeat BoE, MPC Minutes to Prompt Fresh Highs

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Pound Overbought on Upbeat BoE, MPC Minutes to Prompt Fresh Highs

Fundamental Forecast for the British Pound: Bullish

The British Pound struggled to hold its ground during the final days of August, with the GBPUSD tagging a weekly low of 1.5426, but the Bank of England (BoE) interest rate decision may help the sterling to preserve the bullish trend dating back to July should the central bank highlight an improved outlook for the U.K. economy. Indeed, the BoE is widely expected to keep the benchmark interest rate at 0.50% while maintaining its asset-purchase program at GBP 375B, and we may see the Monetary Policy Committee refrain from releasing a policy statement should the group vote unanimously to retain its current policy.

It seems as though Governor Mark Carney is becoming upbeat on the economy as he sees a more broad-based recovery in the U.K., and the central bank head may show a greater willingness to retain the wait-and-see approach for an extended period of time as the MPC continues to operate under its inflation-targeting framework. Another 9-0 vote should help to shore up the GBPUSD as it dampens the scope of seeing a further expansion in the BoE’s balance sheet, and we may see a growing number of central bank officials scale back their dovish tone as growth and inflation picks up.

Despite the forward-guidance for monetary policy, expectations for a further rise in economic activity may heighten the outlook for inflation, and it seems as though the central bank is slowly moving away from its easing cycle as the economy gets on a more sustainable path. In turn, the inflation ‘knock out’ may become a more likely scenario for the U.K., and the BoE may take steps to ensure its credibility as price growth has held above the 2% target since December 2009.

The GBPUSD certainly appears to have carved a near-term top around the 1.5700 handle as it failed to put in a close above the 38.2% Fibonacci retracement (1.5680-90), and the relative strength index may highlight further weakness in the exchange rate as the oscillator fails to retain the bullish trend carried over from July. Nevertheless, the upward trending channel in the GBPUSD may continue to take shape should we see a material shift in the policy outlook, and the pair may continue to carve a series of higher highs paired with higher lows as market participants scale back bets for additional monetary support. - DS

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