By Jameel Ahmad, Chief Market Analyst at FXTM
Prior to Bank of England (BoE) Governor Mark Carney disappointing the Sterling bulls, the GBPUSD managed to record a further 2015 high at 1.5746 on Wednesday following the UK unemployment rate being announced at a seven-year low. The markets welcomed another robust employment report from the UK economy, which encouraged investors to continue buying Sterling. This bullish market sentiment changed swiftly though and investors became tempted to begin closing positions on a currency that has rallied intensely since last week’s unexpected Conservative election victory, after Governor Carney repeated some concerns over the UK economy during the latest BoE inflation report.
The BoE has always contained strict opinions on inflation, and Carney repeated these once again on Wednesday. There was optimism that the BoE’s dovish views would be a little more upbeat following the recent bounce in the price of oil, but this has not been the case and for as long as these dovish views remain strong, any possible UK interest rate expectations emerging for later this year and perhaps early 2016 will probably be dispelled. What Carney has probably tried is to slow down the recent Sterling rally because a hawkish speaking BoE Governor could have inevitably led to the Cable suddenly returning to 1.60.
A stronger Sterling also drags on inflation expectations and by keeping Sterling relatively low, the disinflationary risks will hopefully weaken. Inflation data will remain a key one to monitor when looking for Sterling volatility and will also be pivotal towards deciding which direction the currency trades in the mid-term. Now that the election risks are out of the way, investors are going to refocus on the UK economic outlook. While the fundamentals continue to perform at a robust level, dovish BoE inflation views will prevent any UK interest rate optimism from emerging again and also prevent the Sterling from experiencing a similar rally to what we encountered this time last year.
Where does the GBPUSD now trade? The pair closing above 1.55 was as significant from a technical standpoint as the close above 1.50 last month and contributed towards the bullish momentum that allowed the pair to climb above 1.57 earlier in trading. Closing above 1.55 is significant and has probably set a new range for the Cable. The issue is that reoccurring dovish views on inflation will continually push back any UK interest rate expectations, with this consequently weighing on investor attraction and preventing the Sterling from rallying further. If the Cable can return to the 1.60 area, it is more likely going to be linked to the USD being vulnerable to further weakness.
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