The UK economic calendar was empty today, but one thing is clear: the outlook for the economy is bleak, and that is why Credit Suisse overnight index swaps are pricing in over 100bps worth of rate cuts by the Bank of England over the next 12 months.
That said, [B]I still see upside potential for the British pound. This is mostly due to my dollar bearish bias, but we also have to look to the release of UK CPI on Tuesday morning.[/B] Indeed, consumer price growth in August is expected to accelerate even faster to a 4.6 percent annual pace, which would mark the sharpest rise since May 1992. Inflation remains of great concern to the Bank of England, but the BOE has a dual mandate to maintain price stability and to promote sustainable growth and employment. The UK has already seen indications of a broad economic slowdown, but adding the fragile nature of the UK’s financial sector to the mix puts the Bank of England in a particularly precarious position, as a rate increase meant to fight inflation could easily push the UK into recession and trigger a severe credit crisis. As a result, the UK’s MPC will likely continue to sound hawkish on inflation in order to contain consumer inflation expectations, but when it comes down to it, their bark may be bigger than their bite as the Bank of England is highly unlikely to actually raise rates. Nevertheless, very strong UK CPI figures could lead the British pound to rally upon release, while soft reading could weigh the currency down.
[B]Related Articles:[/B] British Pound Interest Rate Forecast, 5 Key Events for the Forex Market This Week 09-15-08
[B] Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.[/B]