Despite a bad month GBP still has the potential to come back
GBP has suffered quite a set-back during July with the market rowing back on UK interest rate hike expectations, however it may still make a comeback – after all there are a number of bullish factors supporting the currency.
The UK is still the most likely of the large economies to increase interest rates first reflecting a robust recovery. However, confusing noises out of the Bank of England over monetary policy has wrong footed traders.
Also, US data has been improving with the US Federal Reserve continuing to scale back its quantitative easing programme making USD more attractive.
Certainly the data coming out of both countries will continue to be a factor for GBP/USD exchange rates. Both countries are likely to see bouts of weak and strong data on the economy, inflation and real estate prices.
Sterling prospects from Q4 onwards
Every month poses a new opportunity for surprises on the data front or from the heads of central banks, which can change forex trends. But there are a number of other factors, which should support GBP as the year progresses. For example, going into Q4 the UK real estate market is likely to pick-up again, which will reignite speculation over raising interest rates.
Another important factor is that the UK faces a general election in May next year. Admittedly this could be a double edge sword for forex markets. The government will want the economy performing at its best (and won't want to disturb the residential real estate market either) to create a feel good factor. That's bullish for GBP/USD.
When the Bank of England does finally raise interest rates it will be for the first time since 2007 making it a highly symbolic moment. The Bank will be keen to make sure it doesn't appear to be influencing the outcome of the election. That could be bearish for GBP/USD.
Raising interest rates too close to the election ie going into 2015 may well be avoided. However, it could still move late this year or very early next year. If the economy is indeed normalising quickly a small pre-emptive move on interest rates may save having to raise them more aggressively later if nothing is done. So far the bank is only talking about gradual increases once they start.
And there's yet another factor – seasonally Nov / Dec can be quite favourable for GBP/USD. Therefore there could still be some life in the GBP/USD rally.
By Justin Pugsley, Markets Analyst MahiFX
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