British Pound Looks To Q1 GDP Report To Support Continued Gains

By Ilya Spivak, Currency Strategist

Fundamental Forecastfor British Pound: Bullish

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

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 thefirst-quarter set of GDP figures. Expectations call for output to rise 0.1percent in the three months through March after shrinking in thefourth quarter, avoiding the onset of a technical recession. Theprobability of such an outcome has been enhanced by an equivalentreading on a closely-watched private sector estimate from NIESR, aLondon-based consultancy. Validation of a return to growth islikely to offer further support to front-end UK bond yields,reinforcing Sterling’s recent gains and offering scope for acontinued advance. Needless to say, a downside surprise would go along 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
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/gbp/2012/04/21/British_Pound_Looks_to_Q1_GDP_Report_to_Support_Continued_Gains.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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