Sterling Expected to Remain Stable Ahead of General Elections
The Bulls are Back for the GBP but it May Prove Short-lived
The GBPUSD pair continues on its upward trajectory, despite the looming threat of Brexit pressures and upcoming elections. In the immediate aftermath of the Brexit vote, the GBPUSD pair plunged to a 31-year low, after trading near 1.51. Both the support and resistance levels for the cable were well established since the June 23 referendum, but the recent breakout has held firm. The current resistance level is 1.3000, and it’s thanks to the announcement that PM May has scheduled elections to consolidate her power in Parliament. The PM is hoping that a greater majority will allow the Tories to have a better negotiating position for the Brexit. However, greater consensus is only from one side. The European Union perspective will not be swayed by what happens domestically in the UK. They want to ensure that there is unanimity in the 27-member bloc’s response to Britain’s departure.
What about Super Thursday and the BOE?
The Bank of England will make a decision on interest rates on Thursday, 11 May 2017. This is one of the most important short-term economic drivers of the GBP. The Brexit issue and the upcoming general election will take a backseat to this economic indicator. The BOE is scheduled to release its quarterly inflation report, which may give added momentum to the cable. Currently, interest rates in the United Kingdom are at 0.25% – a record low. One of the factors that may drive up interest rates with MPC members is inflation. Recall that the Bank of England targeted an inflation rate of 2% before it will consider reversing accommodative monetary policy in favour of monetary tightening. Even if the MPC does not decide to raise interest rates in the UK, any dissent among members will be viewed as positive news for the GBP.
On 16 March, the BOE Monetary Policy Committee (MPC) kept the interest rate at 0.25%. Additionally, it was decided to continue making asset purchases valued at £435 billion. The MPC anticipates that aggregate demand in the UK will drop as the year progresses, as real income growth slows. The inflation target of 2% will likely be achieved before the year’s end, rising above 2% by 2018. One of the problems in the UK is lukewarm wage growth. Currently, the forecast for Thursday, May 11, 2017 is 0.25%, and quantitative easing is expected to continue at £435 billion. This will have a muted effect on the value of the GBP. It will be interesting to see what is included in the MPC meeting minutes, and how the BOE interest rate decision and quantitative easing speeches are received. Super Thursday always moves the needle on the sterling, and upside momentum is expected this time around.
The Fed will take center stage as well
The fluctuating fortunes of the GBP/USD pair will be heavily influenced by the decisions taken at the Federal Reserve Bank. There is a high probability of interest rate hikes in June, as the Fed tightens the screws on monetary policy with a possible 25-basis point rate hike. This will reverse the current course of the GBP/USD pair. Many voting members of the Federal Open Market Committee, including New York Fed president, Dallas Fed president and Minneapolis Fed president will be making their case for or against rate hikes. Recent US economic data releases have been bullish, indicating that the time is nigh for rate hikes in the US. Regardless, the short-term projections for the cable remain bullish and we could see new monthly high levels reached in May.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.