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GBP/USD to Eye Fresh Highs as U.K. GDP Highlights Stronger Recovery

David Song

GBP/USD to Eye Fresh Highs as U.K. GDP Highlights Stronger Recovery

Fundamental Forecast for Pound:Bullish

The GBP/USD may continue to mark fresh highs ahead of the next Bank of England (BoE) meeting on May 8 as the stronger recovery in the U.K. puts increased pressure on the central bank to normalize monetary policy sooner rather than later.

The fundamental developments coming out of the U.K. may continue to heighten the appeal of the British Pound as the region’s 1Q GDP report is expected to show a pickup in economic activity, and BoE Governor Mark Carney may adopt a more hawkish tone for monetary policy as the outlook for growth and inflation improves.

Despite concerns surrounding the current account deficit, it seems as though the Monetary Policy Committee (MPC) will do little to halt the appreciation in the sterling as positive real wage growth paired with rising home prices renews the threat for inflation, and the central bank may continue to look for a higher exchange rate as it helps to achieve price stability. At the same time, the BoE may have little choice but to take further steps to cool the housing market as the underlying momentum in U.K. home prices raises the risk for an asset-bubble, and a further shift in the policy outlook should continue to paint a bullish outlook for the GBP/USD as the Federal Reserve remains reluctant to move away from its zero-interest rate policy (ZIRP).

As a result, the GBP/USD should continue to carve a series of higher highs & higher lows in 2014, and we will retain our approach in looking for opportunities to ‘buy dips’ in the pair as interest rate expectations improve. In turn, it seems as though it will only be a matter of time before the GBP/USD clears the 1.6850-60 region, the 78.6% Fibonacci expansion from the February advance, and we may see the 1.7000 handle come on our radar as the pound-dollar carves a higher low in April. - DS

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