GBP/USD: outlook for July 18-24
British pound strengthened by more than 3% during the past week. Sterling recovered because of 2 main reasons: return of political stability to the UK and the Bank of England’s decision not to ease monetary policy in July.
Theresa May replaced David Cameron as Britain’s Prime Minister. Although May was a supporter of the UK staying in the European Union, she underlined that “Brexit means Brexit” and the country will leave the EU. Still, it looks like the leaving will be a long process.
British central bank didn’t cut the benchmark interest on Thursday, although such move was already priced in GBP/USD. As a result, traders started closing massive GBP shorts pushing the currency higher. Only one member of the central bank voted for a rate cut. Governor Carney decided to wait for the post0referendum economic data, but gave a strong signal of easing next month.
Next week we may see more covering of GBP short positions, which should provide support for the pound. Note, though, that there are serious resistance levels lying ahead: 1.3500 and 1.3830. Taking into account the fact that more monetary stimulus will almost certainly come from the Bank of England in 3 weeks at the August meeting, investors will likely use the pound’s recovery to enter in new short positions. Support is at 1.3120 and 1.3000.
In British economic calendar next week pay attention to inflation figures on Tuesday, labor market data on Wednesday and retail sales and public sector net borrowing on Thursday. Only very week figures could drive sterling significantly lower.