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This Week Can Determine Future of Sterling

February 10, 2014 at 21:45 by Vladimir Vyun

Stack of coins on 10-pound and 20-pound billsThe Great Britain pound was not performing particularly well this year, trading in a range, but with a downside bias. Last week, the currency started with a loss, but managed to bounce by the weekend, closing flat. This week may be very important in deciding the future of sterling.

To assess the future performance of the pound one has to understand the past and the current behavior of the UK currency. Why the currency was rallying, but the rally faltered? The obvious reason for the past strength of the sterling was the very good-looking state of Britain’s economy, which was recovering with a steady pace, and this led to belief that the Bank of England is going to raise interest rates comparatively soon. So why the currency feels not that well right now? This is because BoE Governor Mark Carney talked down interest rate hike expectations, explaining that the central bank is not in a hurry to tighten monetary policy. Such comments disappointed traders, removing the significant factor to be bullish on the pound.

The BoE indeed refrained from changing its policy at the last week’s policy meeting. Unlike other central banks, Britain’s bank has not habit to release extensive statements, explaining its decision. Usually, traders have to wait for minutes of a meeting to understand the policy makers’ way of thinking. But the central bank will release Inflation Report this week, which may be even more important than the minutes. The Report will be accompanied by press-conference at which policy makers, Carney among them, will be talking and expressing their thoughts regarding the Report. Their comments are very likely to set a trend for the sterling in a short term (or perhaps event for a longer period).

The most important event outside of Britain will be the speech of US Federal Reserve Chairwoman Janet Yellen. It will be interesting to hear what Yellen has to say about the future policy of the Fed, especially in the light of the latest employment data, which was mixed at best. Many analysts do not believe that the US central bank is going to slow the pace of stimulus reduction, but the question about the Fed’s reaction to the recent economic reports (or will there be any reaction at all) remains.

So how do experts feel about this week’s performance of the sterling? DailyFX is pessimistic, believing that this year’s weakness of sterling indicates a change of the traders’ sentiment and it means that the currency is likely to fall further. Forex Crunch is less bearish, preferring to wait for Wednesday’s Inflation Report and Carney’s speech and being neutral on the pound in the meantime.

If you have any questions, comments, or opinions regarding the Great Britain Pound, feel free to post them using the commentary form below.

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