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British Pound to Face Headwinds as Interest Rate Expectations Falter

British Pound to Face Headwinds as Interest Rate Expectations Falter

2011-02-26 01:48:00
Michael Wright, Currency Analyst
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British_Pound_to_Face_Headwinds_as_Interest_Rate_Expectations_Falter__body_ToF_GBP_022511.png, British Pound to Face Headwinds as Interest Rate Expectations Falter

British Pound to Face Headwinds as Interest Rate Expectations Falter

Fundamental Forecast for British Pound: Bearish

The British pound lost ground against the greenback this past week, falling some 1.08 percent amid uncertainty surrounding the region’s economic outlook, while risk aversion regains its footing due to tensions in the Middle East and debt concerns in Europe. Indeed, next week’s calendar in the U.K. will be fairly muted with regards to event risks; however, as technical indicators begin to paint a bearish picture, currency traders should not rule out additional looses in the pound.

The GBPUSD witnessed whipsaw price action over the past 5 days as fundamental developments failed to provide market participants with a clear bearing towards the chance of a rate hike by the Bank of England in the near term. As of late, consumer prices remain stubbornly above the central bank’s target and are expected to push higher due to the increase in value added taxes. Moreover, BoE Governor Mervyn King warned that inflation could push somewhere in the area between 4 and 5 percent over the next few months. As a result, the Bank of England Minutes showed that Spencer Dale joined Andrew Sentance and Martin Weale in pushing for a rate hike. Outside of price concerns, recent developments in the U.K. heave lead traders to discount an increase in borrowing costs in the near term. Fourth quarter economic activity posted a 0.6 percent contraction amid expectations of a 0.5 percent decline, while total business investment slumped 2.5 percent in the same period. Also worrying this past week was the fact that CBI reported sales posted its lowest reading since June 2010.

Next week, GBP traders will be faced with Nationwide house prices, PMI manufacturing, and the M4 money supply. As economic outlook already comes into question, dismal releases will not only send the pound lower against most of its counterparts, but may also lead the central bank to take a wait and see approach before tightening monetary policy. Taking a look at price action, the GBPUSD recently broke below its rising daily trend line, while the parabolic SAR flipped to the downside, signaling for additional losses. At the same time, the MACD has yet to reverse course after crossing over to the downside earlier this month. All in all, downside risks towards the 1.59 area. –MW

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