Fundamental Forecast for British Pound: Bullish

The British pound pared the sharp decline from earlier this month, with the exchange rate bouncing back from a fresh yearly low of 1.5327, and the sterling may continue to gain ground in the week ahead as the economic docket is expected to reinforce an improved outlook for the region. A rise in U.K. mortgage approvals paired with an expansion in consumer credit should spur a bullish reaction in the GBP/USD, and the batch of positive developments may lead the Bank of England to maintain a wait-and-see approach throughout the remainder of the year as the recovery appears to be gradually gathering pace.

However, speculation for additional monetary stimulus continues to instill a bearish outlook for the sterling, and the British Pound may face additional headwinds over the near-term as the BoE shows an increased willingness to expand the asset purchase program beyond the GBP 200B target,. Indeed, board member Spencer Dale talked up speculation for more easing as the region faces an increased risk of a double-dip recession, and the MPC may heed to Adam Posen’s call to widen the Asset Purchase Facility by another GBP 50B as policy makers see greater risk of undershooting the 2% target for inflation. The protracted recovery in the U.K. certainly appears to be spurring a growing rift within the MPC, and more members of the committee may push for additional quantitative easing in an effort to encourage a sustainable recovery. In turn, the rebound in the British Pound could be short-lived, and the sterling may continue to give back the advance carried over from the previous year as growth and inflation falter.

In turn, we may see the GBP/USD make another run at the 50.0% Fibonacci retracement from the 2009 low to high around 1.5250-70, but the near-term correction looks poised to accelerate as the relative strength index bounces back from a low of 19. Should the RSI continue to come off of oversold territory, the pound-dollar may work its way back towards the 38.2% Fib around 1.5690-1.5700, but the GBP/USD may face range-bound price action during the final days of September as market participants weigh the outlook for monetary policy.

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