British Pound Forecast: Bullish
- The Bank of England will make its May monetary policy decision on Thursday
- It’s highly unlikely to cut rates, but may give some clues as to when it might
- GBP/USD has some momentum, can it keep it?
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The greenback has been generally boosted by the pushing back of expectations as to when the Federal Reserve might get around to cutting rates. The markets are pretty sure there’ll be no more increases, but it’s also far from certain now that there’ll be more than a single cut this year.
That prognosis at least was bolstered on May 3 by the release of official labor market data out of the US. April’s rise in new nonfarm jobs missed forecasts substantially, while the unemployment rate ticked up. It’s too soon to tell if this is a minor blip in what has been a strong data series, or something more serious. However, markets leaned toward the latter in their reaction, which accounts for some of GBP/USD’s vigor.
Back to the Pound. The Bank of England will give its May monetary policy decision on Friday. No change is expected. Indeed, forecasts as to when rates might fall have been pushed back, to the point where the market may well be relieved if it gets even one small reduction this year, possibly in the third quarter. However, the voting split on the nine member Monetary Policy Committee will be of great interest. Last time eight voted to leave rates alone, and one wanted to reduce them.
To some extent the same difficulty bedevils all major central banks. Inflation may be heading in the right direction, but it remains above target and is proving ‘stickier’ than many hoped at the start of this year. However, unlike the Federal Reserve, the Bank of England is presiding over an anemic economy. Indeed, this month’s forecasts from the Organization for Economic Cooperation and Development expected the United Kingdom to be the weakest economy in the Group of Seven next year.
Given that it’s perhaps hard to see why GBP/USD should remain quite as elevated as it does. It certainly remains far closer to the last eighteen months’ peaks than to their lows. Some of this is accounted for by a general revival in risk appetite. However, most of it must be down to the fact that the markets are now far from sure that UK rates will be falling much faster than those in the US. As nothing is likely to upset that view in the week ahead, Sterling’s uptrend may have a little further to run.
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The downtrend channel from the peaks of late February remains very much in play, with the last two weeks’ bounce clearly spurred by a bear failure at its lower boundary. Retracement support at 1.2672 is now in focus with its fate into the trading week’s end likely to be a good directional clue.
If the current downtrend channel holds, it must surely give way, putting the spotlight on late October’s lows just above 1.2600 and that psychological level itself. Sterling bulls will hope to try the channel top, with the 50-day moving average now providing resistance just ahead of it.
Despite a couple of weeks’ gains, the Pound looks by no means overbought at current levels and, while strong long-term gains look unlikely, there does appear to be a little bullish momentum behind the Pound now.
So, it’s a bullish call this week, albeit a very cautious one.
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–By David Cottle for DailyFX