British Pound Looks To Q1 GDP Report To Support Continued Gains

By Ilya Spivak, Currency Strategist

Fundamental Forecast for British Pound: Bullish

The British Pound stands apart from most of its major counterparts, with prices primarily responsive to domestic monetary policy expectations rather than the broad-based sentiment trends that dominate much of the FX space. Indeed, GBPUSD now shows a formidable correlation with 2-year UK bond yields, which implicitly reflect traders' outlook for the near- to medium-term path of borrowing costs.

The reorientation toward Bank of England policy emerged last week after CPI figures showed that core inflation unexpectedly accelerated to an annual pace of 2.5 percent in March, marking the first increase in five months. The move may have fizzled if not for an unexpectedly hawkish set of minutes from April’s BOE policy meeting. Not only did the voting balance against additional stimulus shift from 7-2 to 8-1, but the MPC official to shift into the status-quo camp was it’s heretofore most dovish member Adam Posen. Impressive unemployment and retail sales data releases likewise helped.

In the week ahead, this puts the focus on the first-quarter set of GDP figures. Expectations call for output to rise 0.1 percent in the three months through March after shrinking in the fourth quarter, avoiding the onset of a technical recession. The probability of such an outcome has been enhanced by an equivalent reading on a closely-watched private sector estimate from NIESR, a London-based consultancy. Validation of a return to growth is likely to offer further support to front-end UK bond yields, reinforcing Sterling’s recent gains and offering scope for a continued advance. Needless to say, a downside surprise would go a long way toward deflating the currency’s momentum.

With that in mind, it is important to note that the Pound’s recent advance against the majors has likely produced the need for a corrective pullback or at least a period of digestion. With that GDP report not due until mid-week, that means the UK unit initially may find itself lacking for firm upside momentum. Indeed, a period of corrective weakness driven by near-term profit-taking appears reasonable. – IS
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