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GBP/USD to 1.27/1.28?
Even with the pullback on Friday, GBP was still one of the best performing currencies against the USD and it will challenge the greenback for the market’s focus in the coming week. Since Prime Minister’s May speech on Tuesday January 17th, we’ve seen a more than 600 pip recovery in sterling. A hard Brexit with no single market access is the worst case scenario for the U.K. but investors seem to take comfort in a clear path forward especially now that they know the government needs Parliament approval to invoke Article 50. In the coming week, the latest PMI reports are scheduled for release but Super Thursday will steal the show – that’s when the Bank of England meets, releases their Quarterly Inflation Report and Governor Carney has a speech. The weak sterling has gone a long way in boosting inflation and economic activity. Policymakers including Carney have recognized these improvements and the central bank could go as far as raising their outlook for the second time since Britain voted to leave the European Union. Growth and inflation has been stronger than expected and while Carney may be concerned about the negative impact of Brexit on the economy in the years ahead, the reality is that business activity and sentiment has been improving. We believe that Carney will reiterate his view that rates could go up or down in the months ahead. While the markets are pricing in a 50% chance of a rate hike by the end of the year, the recent recovery in sterling and the possibility of further near term gains should translate into slower growth in February. We like buying pounds into the Quarterly Inflation Report especially as it dips towards 1.25 with a target of 1.27/1.28.
Technically GBP/USD broke above the 50 and 100-day SMAs this past week and as long as it holds above 1.2400, a bottom is in place with the currency pair poised to make run for the December high of 1.2775. However if it sinks below the 50 SMA (blue line) then its back to 1.22 for the pair.