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Can the British Pound Regain its Footing Next Week?

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Can the British Pound Regain its Footing Next Week?

The British pound ended the week on firm footing against its US counterpart, advancing after mixed economic reports undermined confidence in US recovery.

The GBPUSD advanced 0.26 percent to 1.6761, after reaching an intraday high of 1.6777. The trend line shows initial support at 1.6692 and resistance at 1.6768.

Friday’s gain was unable to erase a weekly loss for the GBP/USD. The pair, which fell to a six-week low in the middle of the week, declined 0.5 percent between Monday and Friday. The weekly decline has investors wondering whether the pound will make another attempt at 1.70 US, or whether optimism in US recovery will keep sterling’s gains capped below that level.

The Bank of England on Monday will kick off an active week for the British pound, after a dearth of economic data over the past five days relegated it to the sidelines. The BOE will report on consumer credit, net lending to individuals and mortgage approvals for the month of April, providing investors with further insights about ongoing developments in the domestic-led recovery.

Markit Group’s closely followed manufacturing PMI will also be released Monday. Economists forecast a slight drop in the headline reading. However, a surprise to the upside could set the tone for the GBPUSD the rest of the week.

Strong fundamentals have helped the British pound become one of the best performing currencies of the year. The markets have grown more confident in UK recovery, which is being driven largely by domestic demand. Underlying this demand is a rapidly improving labour market.

UK unemployment declined 133,000 between January and March, the lowest level since January 2009. Employment surged 283,000 over the same period, the biggest quarterly increase in more than four decades.

Broad and rapid improvements in the labour market forced the BOE to abandon its rate-hike guidance earlier this year. The central bank made the unemployment rate the lynchpin of monetary policy last summer by announcing it would not even consider raising interest rates until the unemployment rate fell to 7 percent. With unemployment falling more rapidly than forecast – standing at 6.8 percent between January and April – the BOE told the markets to disregard the previous threshold.

Pound bulls hope strong economic data will force a debate at the BOE to begin raising interest rates. The BOE is widely expected to become the first major central bank to begin lifting rates. According to several market insiders, this process could begin in early 2015.

Strong economic data on Monday will further validate the bulls’ position, as they set their sights on 1.70 and beyond. The pound fell just short of that feat earlier this month, hitting an intraday high of 1.6997.

Traders may find the impetus to drive up the GBPUSD on Wednesday when the Bank of England announces its rate decision. While no change to the interest rate is expected, the markets will monitor the language of the rate statement to determine the central bank’s outlook on recovery.

The minutes of the meeting will be released June 18

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