A massive rebound on GBPUSD

8 February, 2017

Yesterday we observed a massive drop and rebound on GBP, the whole initial decline was erased. As a reminder, yesterday GBP dropped almost by 1% against the USD after BBG reported that the House of Commons voted down two amendments by the main opposition party that required ministers to give Parliament regular Brexit updates. It also shot down attempts requiring May to work with the U.K.’s devolved governments in Scotland, Wales and Northern Ireland. This means the government is one step closer to starting the Brexit process the way it wants, without any compromise - which is generally a GBP-negative news.

However the political turmoil was extinguished by words of Kristin Forbes. She said that she is beginning to grow uncomfortable with the trade-off embodied in BOE’s current forecast. Forbes added that if the U.K. economy continues on its current trajectory, accelerating inflation may push her to vote for an interest-rate increase.

Inflation in UK is moving close to BOE’s target, source: Macrobond, XTB, BOE forecasts that inflation (1.6% in December) will accelerate above 2% target this year, Forbes said that it could strengthen faster than projected, which will then make it “increasingly difficult” to justify tolerating a large overshoot

Forbes added that the MPC should be nimble and willing to quickly adjust the appropriate path for monetary policy in either direction as needed. In her view if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate. Politics remain the biggest risk for the GBP. The final vote on Brexit in the House of Commons is still ahead of us but it will rather be a formality.

GBPUSD rebounded from the crucial support area at 1.24 and formed a pinbar. Therefore a leg higher towards the upper bound of the consolidation cannot be excluded and if a new higher low is followed with a new higher high we could see a change of trend on the GBPUSD.

The crucial support area at 1.24 has been defended, we could see a leg higher on GBPUSD, source: xStation5


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