British Pound Eyes 1.6800+ on BoE Policy- Still Favor ‘Buying Dips’

Fundamental Forecast for the British Pound: Bullish

• GBP/USD Surges Through $1.65 on BoE’s Quarterly Inflation Report
• GBP/USD Approaches 2014 High as GBP/AUD Breakout Begins
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The British Pound rallied to a fresh yearly high of 1.6722 following the Bank of England (BoE) Inflation Report, and the GBPUSD may press higher next week should the fundamental developments coming out of the U.K. highlight a stronger recovery for 2014.

Indeed, another 20.0K drop in U.K. Jobless Claims should prompt a bullish reaction in the sterling, but a soft Consumer Price report paired with a marked slowdown in Retail Sales may generate a near-term correction in the GBPUSD as the pair carves a higher high in February.

Nevertheless, it seems as though the BoE removed the 7% unemployment threshold as jobless claims are expected to contract for 14 consecutive months in January, and the Monetary Policy Committee (MPC) Meeting Minutes may spur a further shift in the policy outlook should we see a growing number of central bank officials show a greater willingness to normalize monetary policy sooner rather than later. As a result, market participants now largely see the first rate hike coming at the end of this year or in early 2015, but Governor Mark Carney may sound increasingly hawkish over the coming months amid the growing threat of an asset-bubble in the U.K.

With that said, the bullish sentiment surrounding the British Pound should gather pace over the near to medium-term, and the next topside target in around 1.6800-50 as the Relative Strength Index breaks out of the bearish trend dating back to September. In turn, we will retain our game plan to ‘buy dips’ in the GBPUSD, and we will continue to look for higher highs paired with higher lows amid the ongoing shift in the BoE policy outlook. – DS