Pound Range at Risk on Hawkish BoE Inflation Report- 1.6300 in Focus

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Pound Range at Risk on Hawkish BoE Inflation Report- 1.6300 in Focus

Fundamental Forecast for the British Pound: Bullish

The British Pound may continue to track sideways next week as it retains the range-bound price action carried over from the previous month, but the Bank of England’s (BoE) Inflation Report may ultimately spark a more meaningful run at the 1.6300 handle should the central bank show a greater willingness to implement it exit strategy ahead of schedule.

As market participants weigh the outlook for monetary policy, we may see a limited reaction to the slew of key data coming out ahead of the BoE report, but the recent trend of better-than-expected data may continue to prop up the sterling as the U.K. recovery gathers pace.

Despite the limited reaction to the BoE interest rate decision, the central bank’s updated forecast may highlight a more dynamic shift in the policy outlook, and the Monetary Policy Committee (MPC) may adopt a more hawkish tone for monetary policy as the pickup in growth heightens the risk for inflation. Contrary to market speculation, the BoE may do little to halt the ongoing strength in the British Pound as it helps to hedge against imported inflation, and it seems as though Governor Mark Carney favors a stronger exchange rate as the British Pound is nearly 5% higher against the U.S. dollar since he took the helm in July.

From a technical standpoint, the GBPUSD could be coiling up for a move to 1.6300 as it builds a short-term base around the 1.5900 region, and the policy outlook may continue to limit the downside for the British Pound as the BoE appears to be slowly moving away from its easing cycle. In turn, we would need to see the Relative Strength Index break the bearish momentum from September to favor a bullish setup, but the BoE inflation report may serve as the fundamental catalyst to generate a breakout or a breakdown in the GBPUSD amid chatter that the BoE will rein in the optimism surrounding the U.K. economy. - DS

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