GBP/USD Monthly Fundamental Forecast March 2015

The GBP/USD closed the month higher than expected but off its high of 1.5595 just days ago. The pound closed at 1.5438 as the US dollar rally was hard to compete against.  UK GDP growth looks well positioned to reaccelerate over the course of 2015 after decelerating in late 2014. Consumer spending will remain the main engine of growth as household real income gets a boost from lower inflation, coupled with solid job creation and rising wage inflation. Business investment should also be solid, though held back to some extent by cutbacks in oil and gas investment. Furthermore, UK export growth should benefit from the firming economic growth prospects in Europe, which should translate into stronger demand for UK products and services. In this context, it is not unreasonable to expect UK GDP growth to approach 3% y/y in 2015. CPI inflation has continued to surprise on the downside and looks set to bottom around zero, or possibly lower.

The Federal Reserve remains on a path to hike interest rates at its June 2015 meeting with the risks skewed to later. Fed Chair Yellen’s monetary policy report to Congress on February 24-25 pointed to the Fed dropping the term ‘patient’ from its March statement and replacing it with language reflecting so-called data dependency. Such a move would put the June meeting into play for a rate hike (failure to remove the word ‘patient’ at that meeting would cause us to push our rate hike call out further). The dilemma for the Fed is whether or not economic growth during H1 2015 will suffice to justify a rate hike: labor data are already strong enough, and the Fed has implied that it thinks that low inflation is a transitory phenomenon tied to low oil prices. Q1 GDP matters quite a bit.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

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