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GBP/USD Holds 5-Year Highs as BOE Rate Decision Looms

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GBP/USD Holds 5-Year Highs as BOE Rate Decision Looms

The British pound held on to its five-year high against the US dollar after positive services data raised speculation the Bank of England could raise interest rates early next year.

The UK service economy expanded sharply in April, with employment rising in line with the positive growth outlook, Markit Group reported Tuesday. Since that release, the pound has been testing the 1.70 US level.

Expectations are high the Bank of England will introduce a rate hike at the beginning of next year. The robust, consumer-led recovery that lifted the British economy from recession continues to be strong. The UK economy is forecast to rise sharply this year. The European Commission now says the British economy will grow 2.7 percent in 2014, up from the previous estimate of 2.5 percent. The International Monetary Fund expects UK GDP to expand 2.9 percent in all of 2014.

The UK economy expanded 0.8 percent in the first quarter, up from 0.7 percent in the final three months of the year. That puts the economy on course for a 3.1 percent expansion year-on-year. Some economists expect UK GDP to expand 1 percent quarter-on-quarter.

By comparison, the US economy barely grew in the first three months of the year. Latest data courtesy of the Commerce Department showed last month’s trade deficit shrank at a narrower rate than government estimates, a sign the US economy probably contracted in the first quarter. The Commerce Department will post a revised GDP estimate for Q1 on May 29.

The BOE is not expected to make any changes at Thursday’s rate meetings. The central bank will keep interest rates at 0.5 percent and the asset purchase facility at £375 billion. In the meantime, the British pound continues to eye 1.70 US.

The GBPUSD pair is currently trading at 1.6962, down 0.07 percent. Initial support is likely found at 1.6920, followed by 1.6878 and 1.6835. On the upside, technical resistance is ascending at 1.7053, 1.7096 and 1.7138.

The GBPUSD has advanced 1.8 percent since the beginning of the year.

In other trading, the EURGBP pair was treading water at 0.8208. The pair fell to a session low of 0.8194 amid disappointing German and French factory data. German factory orders fell 2.8 percent in March amid declining demand for consumer and capital goods.

Thursday also sees the release of the Halifax house price index. UK house prices are expected to have risen at an annualized rate of 9.1 percent between January and March, estimates show.

The Office for National Statistics will close out the week with a spate of economic data ranging from factory production to total trade. Economists expect UK industrial production to have risen 2.4 percent annually in March, compared to 2.7 percent the prior month. Manufacturing production is expected to have eased to 2.9 percent, following a gain of 3.8 percent. The goods trade deficit is expected to have eased slightly in March from £9.094 billion to £9 billion.

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