British Pound Eyes Big Moves Ahead

The British Pound saw its worst weekly decline against the US dollar in over 3 years, as an overwhelming greenback onslaught combined with bearish economic developments to send GBPUSD to 21-month lows. Yet pronounced drops in the euro actually left the Sterling at its highest levels in three months against its EMU counterpart, and outlook for the currency may not necessarily be as dim as recent GBPUSD price action would suggest.

[B]British Pound Eyes Big Moves Ahead

Fundamental Outlook for British Pound: Bearish[/B]

The British Pound saw its worst weekly decline against the US dollar in over 3 years, as an overwhelming greenback onslaught combined with bearish economic developments to send GBPUSD to 21-month lows. Yet pronounced drops in the euro actually left the Sterling at its highest levels in three months against its EMU counterpart, and outlook for the currency may not necessarily be as dim as recent GBPUSD price action would suggest. Our fundamental bias for the British Pound remains bearish due to a steady stream of disappointing economic data, but the coming week’s developments could potentially bring a change in the tide for the recently downtrodden UK currency.

Soon-to-be released Consumer Price Index results, UK Jobless Claims data, and a Bank of England Quarterly Inflation Report all show potential to force major moves in British Pound currency pairs. With the first major event on the ledger, analysts predict that CPI figures will show headline domestic inflation at a whopping 4.2 percent—a full 2.2 percent above the Bank of England’s target rate of 2.00. Forecasts for steady gains in inflation have thus far been unable to shift market outlook for the future of UK interest rates, but a significantly higher-than-expected result could be just enough to boost BoE rate expectations. We will certainly get a better grasp of where the Bank of England is likely to go with future interest rates in the following day’s key Quarterly Inflation Report.

Given uncertainty surrounding outlook for British Pound yields, traders will be quick to react to any significant shifts in rhetoric in the BoE’s Inflation Report. Hawkish rhetoric or any explicit mention of monetary policy tightening could be just enough to lift forecasts for GBP rates. Overnight Interest Swaps currently show forecasts of 50 basis points in BoE interest rate cuts through the coming 12 months. Given that markets predict 80 basis points in interest rate increases from the US Federal Reserve, it is little wonder that we have seen the GBPUSD slide to fresh lows. The results of the Quarterly Inflation Report may certainly drive GBP volatility, while an earlier-morning UK Jobless Claims data release could likewise drive sharp price moves on any surprises. - DR

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