gbp fundamentals

British Pound Forecasts Bearish on Bank of England Rate Predictions

Friday, 02 January 2009 22:36:18 GMT  |  David Rodriguez, Quantitative Analyst

The British Pound saw an especially volatile week of currency trading, as illiquid market conditions fueled truly shocking moves in the British Pound/US Dollar pair. Yet the GBP/USD finished the week roughly flat, and traders now turn their eyes to a highly-anticipated Bank of England Rate Decision in the week ahead. Traders fully expect that the central bank will take UK interest rates down to their lowest levels in their 300+ year history, but uncertainty surrounding the result is likely to cause significant volatility in British Pound exchange rates.

Fundamental Outlook for British Pound: Bearish

- View our British Pound/US Dollar Exchange Rate Forecast for January
- Euro/British Pound Continues Strong on Bank of England Rate Outlook
- Bank of England Rate Decision one of the top five forex market events of the week

A steady stream of disappointing British economic data leaves overall GBP fundamentals in a depressed state, and further economic releases due in the week ahead are expected to exacerbate the woes. First on the ledger is a forward-looking Purchasing Managers Index for the UK Services industry. Analysts widely predict that the key Services sector contracted at its fastest pace in the PMI survey’s 12-year record—prompting many to call for aggressive Bank of England interest rate cuts through the foreseeable future. A particularly dismal PMI Services result could potentially have an effect on BoE rate expectations, but analyst and trader expectations have already priced in aggressive monetary policy easing from the British central bank.

The Bank of England rate decision will be important in setting yield expectations for the British Pound. The worst economic recession in at least two decades warrants a substantial monetary policy response, but traders are unsure whether the BoE will truly follow the US Federal Reserve’s footsteps in taking short-term rates near zero percent. It will be subsequently be important to watch both the interest rate decision and the attached statement. Surprises in either could easily lead to pronounced British Pound exchange rate volatility.  – DR

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