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GBP/USD looks for a breakout

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GBP/USD looks for a breakout

The GBPUSD edged higher Tuesday, as a marked improvement in UK consumer inflation heightened expectations for a rate hike courtesy of the Bank of England.

Consumer prices in the UK rose 0.4 percent in April, double the previous month’s rate, the Office for National Statistics reported today. Year-on-year, consumer prices rose 1.8 percent, up from March’s 1.6 percent annual pace.

The so-called core measure, which excludes volatile products such as food and energy, increased 2 percent annually.

All inflation figures beat forecasts.

The latest inflation readings will put pressure on the BOE to normalize monetary policy, which investors believe will result in a rate-hike in the early part of 2015. Although the central bank remains committed to low interest rates for the time being, the rapid pace of UK recovery will continue to boost market sentiment for a material shift in monetary policy. This could send the GBPUSD to fresh highs.

The pair advanced to a daily high of 1.6856 and consolidated at 1.6841, gaining 0.15 percent. Initial support is likely found at 1.6789 and resistance at 1.6872.

The pound fell back from multi-year highs last week after the BOE Inflation Report disappointed the markets and overshadowed a strong employment report. The central bank’s inflation outlook was largely unchanged, as BOE Governor Mark Carney downplayed expectations of an earlier-than-expected rate-hike. However, investors are speculating there may be growing dissent within the Monetary Policy Committee as policymakers anticipate a faster recovery in 2014.

BOE officials anticipate UK growth to be 3.4 percent this year, exceeding the latest estimate from the International Monetary Fund (2.9 percent) and the European Commission (2.7 percent). The BOE cited strong growth in output and real incomes as the main catalysts behind the strong forecast.

The minutes of the latest MPC meetings, which will be released Wednesday, could reveal whether officials are indeed conflicted about when to raise interest rates. The Bank of England is widely expected to become the first major central bank to boost interest rates, but efforts to cool the housing market, combined with persistent slack in the economy, could put pressure on price growth.

The central bank has already committed to reining in the booming housing market. According to Carney, this could entail placing a cap on how much money individuals can borrow or changing the terms of the government’s controversial Help to Buy scheme.

In other trading, the EURGBP declined 0.17 percent to 0.8139, rebounding from an intraday low of 0.8120. Initial support is likely found at 0.8126 and resistance at 0.8168. The pair has declined more than half a percent over the previous five days amid signs the European Central Bank was prepared to introduce more stimulus to help lift the Eurozone out of dangerously low inflation.

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