The GBP USD is trading higher this morning after the Bank of England raised its inflation forecast and indicated it will begin tightening monetary policy beginning in the third quarter.
The BoE in its quarterly inflation report said its near-term inflation forecast is “markedly higher” than in February. High energy costs were to blame, leading the BoE to say that it expects this to weaken growth prospects.
While predicting that the inflation rate may reach 5%, the central bank said that consumer-price inflation will only test the 2% target over the next two years if it raises its benchmark interest rate to meet the market’s demand.
GBP USD may test important resistance cluster at 1.6564 to 1.6566.
The Sterling surged versus the U.S. Dollar on the news, breaking out to the upside above a steep uptrending Gann angle from the 1.6270 bottom at 1.6430 today. With upside momentum building, this price has become the new support.
Technically, the main trend is up. A new higher bottom has been formed at 1.6270. A trade through this level will turn the main trend down. Based on the short-term range of 1.6746 to 1.6270, traders should watch for a retracement to 1.6508 to 1.6564. A downtrending Gann angle is at 1.6566, making 1.6564 – 1.6566 an important target and resistance cluster.
With the Bank of England poised to raise interest rates and the U.S. still maintaining a loose monetary policy, look for the British Pound to show strength because of the favorable interest rate differential.
