Fundamental Forecast for British Pound: Bullish

The British pound broke out of its narrow range on Friday, with the GBP/USD rallying to 1.6255, and the rebound in the exchange rate may gather pace over the following as the headline reading for U.K. inflation is expected to breech 4 percent. Consumer prices are projected to grow at an annualized pace of 4.2 percent in February, with the core rate of inflation anticipated to increase 3.1 percent after rising 3.0 percent in the previous month, and heightening price pressures could renew speculation for a rate hike in the first-half of 2011 as the central bank’s credibility to ensure price stability comes under increased scrutiny.

In turn, the BoE minutes could reveal a growing shift within the MPC, and the central bank may show an increased willingness to gradually normalize monetary policy over the coming months in an effort to stem the risk for inflation. A quarterly survey released by the central bank earlier this week showed consumer inflation expectations increase to 4.0 percent in February to mark the highest reading since August 2008, with 62 percent of respondents expecting to see a rate hike over the next 12 months. Although, recent comments from BoE board member Charles Bean suggests that the central bank will retain its wait-and-see approach as higher interest rates impede on economic activity, and the central bank may see scope to support the real economy going into the second-half of the year as it aims to encourage a sustainable recovery.

However, the market reaction to the BoE minutes could be short-lived as Chancellor of the Exchequer George Osborne is scheduled to deliver the budget statement on the same day at 12:30 GMT, and the new coalition in Britain may expand the scope of its austerity measures in an effort to better manage public finances. As the government tightens fiscal policy to curb the budget deficit, the extraordinary measures are likely to instill a weakened outlook for future growth, and the central bank may have no choice but to retain the monetary expansion in order to balance the risks for the region.

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