Fundamental Forecast for the British Pound: Bullish

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The British Pound appears to be coiling up for another run at the 1.6600 handle as the positive developments coming out of the U.K. economy raises the Bank of England’s (BoE) scope to normalize monetary policy ahead of schedule.

With the BoE Minutes due out next week, a more hawkish policy statement may spark a near-term rally in the sterling, and Governor Mark Carney may show a greater willingness to raise the benchmark interest rate later this year as U.K. Jobless Claims are projected to contract another 32.0K in December. Indeed, Monetary Policy Committee (MPC) board member Ben Broadbent emphasized that unemployment is falling faster than the central bank expected while speaking earlier this week, but it seems as though there’s growing bets that the BoE will implement a dovish twist to its forward-guidance in order to preserve its highly accommodative policy stance for an extended period of time.

There’s speculation that the BoE will lower the unemployment threshold to 6.5% from 7.0% in its quarterly inflation report scheduled for February 12, and this theme presents the largest risk to the bullish British Pound forecast as market participants weigh the outlook for monetary policy. Nevertheless, Credit Suisse overnight index swaps are starting to show expectations for higher interests over the next 12-months as the BoE moves away from its easing cycle, and the shift policy outlook should continue to prop up the sterling over the near to medium-term as the central bank starts to unwind its non-standard measures.

With that said, we will continue eye the topside targets for the GBPUSD as long as it holds above the 1.6300 handle, and the rebound from key support may spark fresh highs in the pound-dollar as it continues to carve a series of higher highs paired with higher lows. - DS

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