GBP/USD Recovers BUT Threats Ahead in Form of BoE Minutes, Retail Sales and GDP Data
- Written by: Gary Howes
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The British pound (GBP) has recovered above the 1.6 level against the US dollar - but can this return-to-form continue?
According to a number of analysts the nascent GBP recovery faces a number of domestic threats in the week ahead. The leading risk will be the release of the minutes from the October meeting of the Bank of England's Monetary Policy Committee.
As we can see GBP enjoys firm support from the 1.6 level:
At the time of writing the pound to dollar exchange rate is trading 0.17 pct lower than at Monday's close at 1.6136.
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GBP Outlook to Driven by Bank of England
GBPUSD saw fresh pressure at the start of the preceding week as markets pushed back the first rate hike from the BoE.
Will these fears be confirmed when the minutes from the last policy setting meeting are released?
The key driver behind this change in sentiment was a disappointing inflation reading - CPI came in at 1.2% year-on-year.
This is much below the BoE’s 2%Y target and, while wages are rising, they are at historically low levels.
Analysts at Morgan Stanley strike a negative tone on the GBP for the near-term:
"Both these facts suggest to the markets that the BoE may keep rates low for a bit longer. The political risks are also building, which may reduce foreign investment. The BoE minutes are likely to be a large risk event for GBP this week."
Credit Agricole say UK MPC minutes from the October meeting are likely to show an unchanged outcome of votes, ie, still two members (Ian McCafferty and Martin Weale) out of nine voting for a rate hike.
The balance of risks to activity and inflation has shifted to the downside recently; therefore the context is less prone for MPC members turning more hawkish.
On the contrary, central banks are becoming focused on weakness in the Eurozone.
But, we reckon markets have already priced this eventuality into the GBP's valuations at the current time.
From this perspective we reckon a repricing in GBP/USD higher could happen as the US Fed eases back on their timing for the first US rate hike.
Dollar Forecast: Morgan Stanley Using USD Setback to Buy. Bullish.
With regards to the USD side of the equation forex markets will keep an eye out for the Fed’s Yellen Speech, Housing Starts, Univ. Michigan Conf., CPI.
Morgan Stanley stay firmly routed in the USD bull camp:
"We remain bullish on USD and see the recent setback as providing a buying opportunity, especially against the high yield currencies. Falling inflation expectations and weaker activity data have pushed equities and USD lower.
"USD has traded like an asset currency – going up when assets have moved higher and vice versa. However, the US running the largest gross asset position globally suggests that the asset-USD relationship is asymmetric. This week the CPI print will be important."
A Bearish Take on the USD's Near-Term Outlook
We have already hinted that there are growing risks that the US Fed could push back the timing on its first interest rate rise.
This view is backed by Manuel Oliveri at BNP Paribas who tells us the majors have space to advance against the US dollar in the current environment:
"We remain of the view that elevated speculative short positioning and further stabilizing monetary policy expectations will lead to a further correction higher in EUR/USD. Weaker than expected US retail sales should come to the detriment of both, inflation and growth expectations.
"This in turn should make a case of Fed members trying to dampen investors’ Fed rate expectations further. This stands in contrast to the ECB, which is unlikely communicating a more aggressive monetary policy stance anytime soon as more time is needed in order to evaluate the latest policy measures' impact on the economy
"Stabilising monetary policy expectations should increase position squaring-related EUR upside risk, especially when we consider that positioning remains close to elevated territory."
