GBP/USD Rally: BoE Having Last Laugh

Many people have criticized the U.K. government’s response to the financial crisis and recession but U.K. officials may be having the last laugh. The latest string of economic data has been surprisingly strong. There are signs of stabilization in both the housing and labor markets. Last week, the Bank of England increased the size of their Quantitative Easing program to ensure that the recent improvements will continue.

According to the RICS House price balance, new buyer inquiries were the strongest in 10 years. Housing market turnover was still low, but that may soon improve as well. The BRC retail sales monitor also jumped 4.6 percent. As a leading indicator for the broader retail sales index, the data suggests that consumer spending improved materially in the month April. The early release of the employment numbers helps to explain why consumer spending has picked up. Although the unemployment rate hit a 10 year high, the number of people claiming unemployment benefits has decreased significantly while earnings saw a smaller than expected decline.

The Bank of England will be delivering its Quarterly Inflation report tomorrow. A more negative tone is expected given the comments made following the last monetary policy decision. This should lead to a correction in the GBP/USD, but that should be looked as an opportunity to add to long positions. I expect any retracement in the GBP/USD to be limited to 1.51 and I am still looking for a move to 1.55.

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