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Will GBP/USD Break 1.70?
FX traders are sitting at the edge of their seats waiting to see if GBP/USD will make another run for 1.70. Tomorrow is a big day for the British pound with the labor market and Bank of England Quarterly Inflation reports scheduled for release. The BoE’s Quarterly report is widely expected to have a big impact on sterling and if the central bank is sufficiently hawkish it could drive GBP/USD to 1.70. In fact the last two times that it was released, it triggered a 175 to 200-pip rally in GBP/USD on the day of the release followed by a move that extended as much 400 pips. This month speculators are not only looking for continued optimism by the central bank but they also expect the BoE to signal plans to tighten monetary policy. If the central bank upgrades their growth forecasts, lowers their employment forecasts and hints that tightening is possible, we expect GBP/USD to clear 1.70 easily. However if they stress that monetary policy remains easy and tightening is a long ways away, GBP/USD could slip below 1.68 quickly and aggressively, cementing 1.70 as the top for the currency. While there is no doubt that economic activity has improved with manufacturing and service sector activity accelerating, retail sales growth has been weak and more importantly, the annualized pace of consumer price growth slowed in the month of March. The strong currency also puts further pressure on inflation and as long as the risk of a jump in inflation expectations is low, the BoE may prefer to keep monetary policy steady for the time being.
Although GBP/USD retraced off its 1.70 high, as long as it holds above 1.6760, the uptrend remains intact. If it breaks below 1.6760, there is no major support until 1.6600. On the upside, if GBP/USD clears 1.70, there is minor resistance at the 2009 high of 1.7043 and nothing beyond that until 1.75.