The British pound lagged against most of the majors as Moody’s Investors Service Ltd said that UK banks may record additional losses on loans and securities of at least £130 billion, after already racking up losses £110 billion since the start of the credit crisis in 2007. Moody’s said the outlook was based on expectations that “the sustained weakness of the UK macroeconomic environment” will translate into “higher loan arrears with ensuing pressure on profitability and capital.”
The British pound faces additional event risk on Tuesday from the release of the UK’s consumer price index (CPI) reading for the month of August is expected to rise 0.3 percent, but the more important part of this report is that the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to 1.4 percent, the lowest since October 2004, from 1.8 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year-end. On the other hand, if CPI holds strong, the currency could rally in response.