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British Pound: Strength to be Tested

The recent strength of the British pound will be tested next week by the busy economic calendar. After hitting an intraday low of 1.9363 earlier this week, the currency has carved out a near term bottom against the US dollar. Like the rest of the world, the only reason why the central bank has stopped cutting rates is because of inflation. Even though the labor market deteriorated for the fourth straight month, the British pound gained strength because both consumer and producer prices increased more than the market expected last month. The minutes from the latest Bank of England meeting will be released next week. Although they left interest rates unchanged at 5 percent, the key will be their voting record.  At the prior meeting 6 members supported the 25bp rate cut, one member called for a 50bp rate cut while another called for no easing at all. We suspect that more members would have favored the most recent pause. In addition to the BoE minutes, we are also expecting UK retail sales and the second release of first quarter GDP.