Forex Trading Update

The Bank of England’s quarter inflation report certainly highlights the biggest event risk for the British pound, and the central bank’s updated forecast may spark a bullish reaction in the GBPUSD should the group see a greater risk for inflation. There’s speculation that the Bank of England will curb its growth forecast as the U. faces a double-dip recession, but the central bank may sound more hawkish time around as the stickiness in price growth raises the risk for inflation. As BoE officials see the economy getting on a more sustainable path in the second-half of the year, we should see the group move away from its easing cycle, and the Monetary Policy Committee may start to lay out a tentative exit strategy as the board no longer sees a risk of undershooting the 2% target for inflation. In turn, we will stick with our bullish outlook for the GBPUSD, and the upward trending channel in the pound-dollar should continue to take shape as gets ready to shift gears.

The greenback gained ground Monday, with the Dow Jones-FXCM US Dollar Index advancing to a fresh monthly high of 10,050, but the reserve currency may come under pressure during the next 24-hours of trading should the economic docket fuel speculation for additional monetary support. Inflation in the world’s largest economy is expected to expand at the slowest pace since February 2011 and easing price pressures sharp a reversal in the EURUSD as raises the Fed’s scope to push through another asset purchase program. However, as the FOMC takes note of the stickiness in underlying price growth, it seems as though the Fed is getting ready to shift gears, and we may see the committee start to lay out a tentative exit strategy as the economic recovery gradually gathers pace.

The Canadian dollar is struggling to hold its ground ahead of the weekend as market participants scale back their appetite for risk, but we may see the loonie regain its footing over the next 24-hours of trading as the economic docket is expected to encourage an improved outlook for the region. Canada is expected to add another 10.0K jobs in April and the ongoing improvement in the labor market may spark a short-term reversal in the USDCAD as it raises the scope for a rate hike. Indeed, the Bank of Canada talked up expectations for higher borrowing costs in an effort to address the record rise in household indebtedness, but we may see the central bank normalize monetary policy throughout the second-half of the year as the economic recovery gathers pace. However, as Governor Mark Carney highlights the risks surrounding the region, it seems as though the BoC will refrain from embarking on a series of rate hikes, and the central bank may continue to strike a balanced tone for the region as the marked appreciation in the local currency as it dampens the outlook for the region.

Australia is expected to shed 5.0K jobs in April following the 44.0K expansion during the previous month, and the slowdown in the labor market may drag on the exchange rate as it dampens the outlook for the $1T economy. Indeed, the Reserve Bank of Australia lowered its forecast for growth and inflation as the central bank expects job growth to ‘remain subdued,’ and it seems as though the central bank will carry its easing cycle into the second-half of the year in an effort to encourage a sustainable recovery. Meanwhile the AUDUSD remains at risk with targets eyed at parity as broader risk appetite remains on the defensive amid ongoing concerns regarding the European debt crisis.

The British pound bounced back during the North American trade, with the GBPUSD paring the overnight decline to 1.6123, and the sterling may continue to consolidate ahead of the Bank of England interest rate decision as market participants weigh the outlook for monetary policy. Although the BoE is widely expected to maintain its current policy in May, the central bank may sound a bit more hawkish this time around as the Monetary Policy Committee takes note of the stickiness in underlying price growth. Indeed, former BoE board members Andrew Sentance, John Gieve and Charles Goodhart talked down speculation for more quantitative easing, with Mr. Sentance seeing scope for a rate hike later this year, while Mr. Gieve said the central bank may extend its asset purchase program for ‘a month or two’ amid the ongoing uncertainties surrounding the region. As the MPC expects to see a more robust recovery in the second-half of the year, we should see the committee move away from its easing cycle, and we may see the central bank start to discuss a tentative exit strategy as policy makers no longer see a risk of undershooting the 2% target for inflation.