Fundamental Forecast for British Pound: Neutral

The relief rally in the GBP/USD exchange rate may gather over the days ahead as it breaks out of a near-term holding pattern, but the Federal Open Market Committee’s (FOMC) May 3 interest rate decision may tame the recent advance should the central bank show a greater willingness to raise the benchmark interest rate sooner rather than later.

Even though Fed Fund Futures continue to highlight a greater than 90% probability the FOMC will stay on hold in May, Chair Janet Yellen and Co. may increase their efforts to prepare U.S. households and businesses for higher borrowing-costs as the committee appears to be well on its way to fulfil its dual mandate for full-employment and price stability. The pickup in the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, may push the committee to adopt a more hawkish tone, and the central bank may lay out a more detailed exit strategy as officials look to unload the balance sheet later this year or in early-2018. At the same time, U.S. Non-Farm Payrolls (NFP) are projected to pick up in April, with the economy anticipated to add another 193K jobs, and a batch of hawkish Fed rhetoric paired with a further improvement in labor market dynamics may curb the near-term outlook for pound-dollar especially as the Bank of England (BoE) appears to be in no rush to move away from its easing-cycle.

However, a more bullish scenario may emerge for Cable should the FOMC stick to the current script and attempt to buy more time in response to the lackluster 1Q Gross Domestic Product (GDP) report. The marked slowdown in private-sector consumption, one of the leading drivers of growth and inflation, may prompt the central bank to revisit its economic assumptions as officials warn ‘market-based measures of inflation compensation had remained low; survey-based measures of inflation compensation were little changed on balance.’ Moreover, NFPs may continue to fall short of market expectations as the labor market appears to be at or near full capacity, and a series of dismal developments may fuel the relief rally in GBP/USD as market participants push back bets for the next Fed rate-hike.