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GBP WEEKLY OUTLOOK: BULLISH RISING INFLATION OUTWEIGHS ECONOMIC WEAKNESS

 Weekly GBP Trading Strategy for British Pound traders of GBP forex binary options, GBP forex etfs, and GBP standard spot market forex instrumentsFundamental Outlook

British Pound Bias: Bullish

  • GBPUSD: Show upward momentum to retest 1.6655 zone
  • British Pound at 18 month high from August 2009
  • Markets suspect persistent inflation data may force BOE to hike rates despite weak economy, austerity
  • Rising Prices in Focus with Inflation Data, Central Bank Decision Ahead

The British Pound ended last week at its highest level vs. the USD since January 2010, as data continued to show inflation rising, further strengthening the odds for a rate hike by the Bank of England, despite the Monetary Policy Committee’s decision to maintain the key benchmark interest rate at 0.50 percent for the coming month.

For now, it appears that, despite increasing prices pressures on the British economy, the Monetary Policy Committee gives growth a higher priority than taming the fastest inflation rate in more than two years. As the government acts austerity measures, policymakers seem to be waiting to gauge whether or not the British economy can handle a draw down in fiscal policy, before withdrawing monetary policy.

However, given some key events in the week ahead, Bank of England policymakers may not be able to hold onto historically low rates for much longer.

  • Monday, key housing data is released, and it is likely to show continued weakness.
  • Tuesday brings the most important event for the week. With consumer price index data due, that is forecasted to another 4.4 percent increase y/y, combined with producer price data from March that showed a 14.6 percent jump in prices on a year-over-year basis, the British economy risks falling into stagflation – high unemployment, high inflation, and low growth rates.
  • Wednesday, unemployment data is due; while the unemployment rate is expected to remain on hold at
  • 8.0 percent, a drop in the underlying jobless claims figure could help provide support to the notion that the British economy is stable enough to raise rates

With the differential between interest rates between the Pound and the US Dollar widening, the GBP/USD could be volatile this week, , with even the slightest hint inflation further boosting interest rate expectations, and the GBPUSD.

Still, the market is increasingly coming to the conclusion that the Bank of England won’t hike interest rates at their next meeting in May, and instead will wait until August to do so. This is consistent with our call and we expect the BOE to remain on hold this quarter.

Economic data has been largely weak with only a couple of upside surprises. One was service sector data for March, yet we believe this was an anomaly and service sector activity played catch-up after weather-related disruption in January and February.

While we suspect the BOE may keep rates steady longer than the market currently expects, there are a couple of important qualifications to remember.

The Q1 GDP release on 27 April could squash rate hike hopes if below 0.8 %, which would be viewed as a disappointment.


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