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British Pound Eyes Fresh Highs on Faster Inflation, BoE Minutes

David Song

British_Pound_Eyes_Fresh_Highs_on_Faster_Inflation_BoE_Minutes_body_Picture_1.png, British Pound Eyes Fresh Highs on Faster Inflation, BoE Minutes

British Pound Eyes Fresh Highs on Faster Inflation, BoE Minutes

Fundamental Forecast for British Pound: Bullish

The British Pound extended the rebound carried over from the previous month, with the GBPUSD climbing to a fresh monthly high of 1.5736, and the sterling may continue to appreciate next week should the fundamental developments coming out of the U.K. further dampen speculation for additional monetary support. Although the Bank of England (BoE) Minutes highlights the biggest event risk for the following week, we’re expecting to see the headline reading for U.K. inflation increase at a faster pace in May, and the stickiness in price growth may prompt the central bank to switch gears later this year in an effort to safeguard its credibility.

Indeed, the BoE Minutes should reveal another 6-3 split within the Monetary Policy Committee after the central bank refrained from releasing a policy statement at the June 6 meeting, and the fresh batch of central bank rhetoric may increase the appeal of the sterling should the board show a greater willingness to conclude its easing cycle in 2013. Beyond the vote count, we’re also very interested to see the updated assessment, and we may see a greater argument to keep the Asset Purchase Facility capped at GBP 375B as the region skirts a triple-dip recession. As Governor Mervyn King sees a sustainable recovery in the U.K., the MPC may adopt a more hawkish tone for monetary policy in the second-half of the year, and the committee remains poised to operate under its inflation-targeting framework as the region is expected to face above-target price growth over the policy horizon. Although there are bets that the next central bank governor, Mark Carney, will implement a growth target for monetary policy, the majority may downplay the benefits of adopting such a policy as they struggle to bring down inflation back towards the 2% target.

As the GBPUSD clears the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-90, we may see a move towards the 100% Fib extension from the March low (1.4830), but we will need to keep a close eye on the relative strength index as it approaches overbought territory. In turn, we may see the GBPUSD mark a fresh high before we get a correction, and we will look for opportunities to buy dips in the pound-dollar as it preserves the upward trend from earlier this year. - DS

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