British Pound Talking Points
GBP/USD gives back the advance following the Federal Reserve interest rate decision as the 10-Year US Treasury yield climbs to fresh yearly high (1.75%), but key data prints coming out of the UK may keep the British Pound within the monthly range as the Bank of England (BoE) reiterates that “UK GDP was projected to recover strongly over 2021 towards pre-COVID levels.”
Fundamental Forecast for British Pound: Neutral
The British Pound tracks the opening range for March as GBP/USD continues to coil just below technical resistance, and the exchange rate may consolidate over the remainder month as both the Fed and BoE retain the current course for monetary policy.
Looking ahead, the update to the UK Consumer Price Index (CPI) may overshadow the Employment report as the BoE points out that “a further increase in unemployment had been projected over the next couple of quarters,” and an uptick in price growth may generate a bullish reaction in the British Pound as “inflation was expected to return towards the 2% target in the spring.”
At the same time, the core CPI is expected to hold steady at 1.4% per annum in February, and signs of sticky inflation may keep the Monetary Policy Committee (MPC) on the sidelines as “developments in global GDP growth have been a little stronger than anticipated.”
In turn, the BoE may rely on its current tools to achieve its policy targets as “the Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably, and Governor Andrew Bailey and Co. may stick to the same script at the next interest rate decision on May 6 as “the Committee judged that the existing stance of monetary policy remains appropriate.”
Until then, fresh data prints coming out of the UK may keep the British Pound within the monthly range as inflation is expected to return to pre-pandemic levels later this year, but key market trends may influence GBP/USD as the US Dollar broadly reflects an inverse relationship with investor confidence.
With that said, the decline from the February high (1.4241) may turn out to be a correction in the broader trend rather than a change in behavior as major central banks rely on their emergency tools to achieve their policy targets, and the exchange rate may continue to exhibit the bullish price action seen in 2020 as long as the Fed stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.”
Recommended by David Song
Download the DailyFX Forecast for GBP
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong