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British Pound Loses May Continue As BoE Weighs Options

British Pound Loses May Continue As BoE Weighs Options

2010-03-19 21:40:00
John Rivera, Currency Analyst
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Mortgage approvals unexpectedly declining for a third straight month should have been a red flag for sterling bulls. The six largest banks in the U.K. continue to tighten lending standards which led to a decline in new loans to 48,000 from 49,000, against expectations for an improvement to 54,000. The BoE’s concerns that restrictive lending could derail the recovery continue to be proven valid and a continuation of the current trend may force further action to provide liquidity to the market. Additional measures would be a bearish sign for the economy and could lead to accelerating pound losses. At the time of release the mortgage report was overlooked as markets focused on a smaller than expected budget deficit for February. Public net borrowing increased by 12.4 billion but missed forecast for 14 billion. Nevertheless, the overall deficit continues to grow and considering the concerns over Greece’s credit troubles, risks that the U.K. could see their AAA rating at risk may also fuel bearish sentiment.

The central bank has forecasted that inflation will eventually be dragged lower by existing slack in the economy. Therefore, the upcoming consumer price report could present major event risk. Economists are looking for inflation to have decelerated to 3.1% from 3.5% but remain above the BoE’s 30.0% threshold. Therefore, we could see another letter from Governor Mervyn King explain the breach and actions intended to bring price growth to the 2.0% target. A greater than expected decline in prices would allow the MPC to maintain easy policy which could be bearish for the pound. A positive retail sales report may help bring an end to the sterling slide as domestic demand is expected to improve by 0.6%. The improvement in the labor market supports a rosier outlook for consumer spending and the economy. -JR

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