Forex: British Pound Rally To Gather Pace, Euro Carving Out Top In May

The British Pound regained its footing on Wednesday as the Bank of England adopted a hawkish outlook for monetary policy, and the sharp rebound in the GBP/USD should gather pace going forward as the pair maintains the upward trend from earlier this year.

Talking Points

• British Pound: BoE Adopts Hawkish Outlook, Inflation To Reach 5%
• Euro: Appears To Be Carving Head-and-Shoulders Top
• U.S. Dollar: Monthly Budget Statement on Tap

The British Pound regained its footing on Wednesday as the Bank of England adopted a hawkish outlook for monetary policy, and the sharp rebound in the GBP/USD should gather pace going forward as the pair maintains the upward trend from earlier this year. The BoE said there's a ‘good chance' inflation will reach 5% this year even after the central bank lowered its outlook for future growth, and expects price growth to remain above the 2% target throughout 2012, which were based on a bank rate of 0.75% by the fourth-quarter of 2011. Governor Mervyn King warned the stickiness in price growth has raised the risk of pushing inflation expectations higher as Britons cope with higher energy costs paired with the rise in the value-added-tax, and went onto say that a rate hike will be the first step towards normalizing monetary policy while speaking at the press conference.

In turn, the BoE minutes due out on May 18 could reveal a growing shift within the MPC, and a greater number of the committee may have pushed for a 25bp rate hike at the policy meeting earlier this month as the central bank puts its credibility to deliver price stability on the line. As the central bank looks to toughen its stance against inflation, investors are now pricing borrowing costs in the U.K. to increase by nearly 50bp over the next 12-months according to Credit Suisse overnight index swaps, and interest rate expectations may gather pace over the following week if the U.K. consumer price report due out on May 17 comes out stronger than expected. As the GBP/USD pares the sharp decline from earlier this month, the pound-dollar may make another run at 1.6800 in the coming days, and the exchange rate may work its way back towards the highs seen back in 2009 as the central bank shows an increased willingness to normalize monetary policy in the coming months.

The Euro struggled to hold its ground during the overnight trade, with the exchange rate falling back to a low of 1.4325, and the single-currency may continue to consolidate during the North American session as European policy makers struggle to restore investor confidence. Indeed, members of the Governing Council maintains a hawkish tone for monetary policy while talking down the risk for contagion, but the European Central Bank may have little choice but to delay its exit strategy further as the EU fails to address the root cause of the sovereign debt crisis. As currency traders dismiss the hawkish rhetoric from the ECB, the Euro certainly remains at risk of facing additional headwinds over the near-term, and the EUR/USD certainly appears to be carving out a head-and-shoulders top in May as it breaks out of the upward trend from earlier this year. In turn, we may see the exchange rate work its way back towards former resistance around 1.4000, and the single-currency will surely face additional selling pressures in the second-half of the year as the economic outlook for Europe remains clouded with high uncertainty.

U.S. dollar price action remained mixed on Wednesday, with the USD/JPY extending the previous day's advance to reach a high of 81.23, and the reserve currency may gain ground throughout the North American trade as equity futures foreshadow a lower open for the U.S. market. As risk aversion appears to be flowing back into the currency market, the lower-yielding currency should outperform against its major counterparts going into the end of the week, as the uncertainties surrounding the global economy bears down on market sentiment. However, as the monthly budget statement is expected to show a 41.0B shortfall in April, the ballooning deficit could dampen demands for the greenback, and the greenback may continue to face mixed price action over the next 24-hours of trading as risk sentiment continues to be the major driver of price action in the major currencies.

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Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	14:30	10:30	DOE U.S. Crude Oil Inventories (MAY 6)		3421K
USD	14:30	10:30	DOE U.S. Gasoline Inventories (MAY 6)		-1046K
USD	14:30	10:30	DOE U.S. Distillate Inventory (MAY 6)		-1398K
USD	18:00	14:00	Monthly Budget Statement (APR)	-$65.0B	-$188.2B

Currency	GMT	Release	Expected	Actual	Comments
NZD	22:00	REINZ House Sales (YoY) (APR)	--	-4.2%	Falls for 16 straight months.
NZD	22:00	REINZ Housing Price Index (APR)	--	3245.4	Rises for the third month.
NZD	22:00	REINZ Housing Price Index (MoM) (APR)	--	1.1%
JPY	23:50	Official Reserve Assets (APR)	--	$1135.5B	Highest in more than three-decades.
CNY	2:00	Consumer Price Index (YoY) (APR)	5.2%	5.3%	Cooling inflation could lead the PBoC to keep rates on hold.
CNY	2:00	Producer Price Index (YoY) (APR)	7.0%	6.8%
CNY	2:00	Industrial Production (YoY) (APR)	14.6%	13.4%	Weakens for the second month.
CNY	2:00	Industrial Production (YTD) (YoY) (APR)	14.5%	14.2%
CNY	2:00	Retail Sales (YoY) (APR)	17.6%	17.1%	Slows for the second time this year.
CNY	2:00	Retail Sales (YTD) (YoY) (APR)	16.7%	16.5%
CNY	2:00	Fixed Assets Investment ex Rural (YTD) (YoY) (APR)	24.9%	25.4%	Highest since June 2010.
JPY	5:00	Leading Index (MAR P)	99.8	99.5	Lowest reading since November.
JPY	5:00	Coincident Index (MAR P)	103.7	103.6
EUR	6:00	German CPI (MoM) (APR F)	0.2%	0.2%	Fastest pace of price growth since October 2008.
EUR	6:00	German CPI (YoY) (APR F)	2.4%	2.4%
EUR	6:00	German CPI - EU Harmonised (MoM) (APR F)	0.2%	0.3%
EUR	6:00	German CPI - EU Harmonised (YoY) (APR F)	2.6%	2.7%
EUR	6:00	German Wholesale Price Index (MoM) (APR)	--	0.2%	Increases for the fifth month.
EUR	6:00	German Wholesale Price Index (YoY) (APR)	--	9.2%
GBP	8:30	Visible Trade Balance (Pounds) (MAR)	-7.500B	-7.660B	Deficit widens for the first time in three-months.
GBP	8:30	Trade Balance Non EU (Pounds) (MAR)	-3.500B	-4.479B
GBP	8:30	Total Trade Balance (Pounds) (MAR)	-3.250B	-3.005B
EUR	6:45	French Current Account (euros) (MAR)	--	-4.1B	Narrows for the first time this year.
USD	11:00	MBA Mortgage Applications (MAY 6)	--	8.2%	Increases for second week.
CAD	12:30	International Merchandise Trade (Canadian dollar) (MAR)	0.4B	0.6B	Surplus widens for first time in three-months.
USD	12:30	Trade Balance (MAR)	-$47.0B	-48.52B	Deficit widens for the first time this year.