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British Pound: BoE Inflation Report Puts GBP/USD Range At Risk

British Pound: BoE Inflation Report Puts GBP/USD Range At Risk

2011-08-06 04:43:00
David Song, Strategist
New_document_1British_Pound_BoE_Inflation_Report_Puts_GBPUSD_Range_At_Risk_body_Picture_5.png, British Pound: BoE Inflation Report Puts GBP/USD Range At Risk

British Pound: BoE Inflation Report Puts GBP/USD Range At Risk

Fundamental Forecast for British Pound: Bearish

British Pound traders will certainly turn their attention to the Bank of England quarter inflation report on tap for the following week, and the central bank’s assessment of the economy should heavily influence the sterling as the MPC maintains a wait-and-see approach for monetary policy. Indeed, the BoE kept borrowing costs at 0.50% while maintain its asset purchase target at GBP 200B, and the central bank may preserve its current stance throughout the remainder of the year as the region faces a slowing recovery.

As the recent developments coming out of the U.K. dampen the outlook for future growth, we may see the BoE highlight an increased risk of undershooting the 2% target for inflation, and the central bank may continue to defy calls to lift the benchmark interest rate off of the record-low as the economic outlook remains clouded with high uncertainty. The bank may also provide a lower growth forecast as private sector activity dissipates, and the central bank may open the door to expand its asset purchase program beyond the GBP 200B target as the government’s initiative to balance the budget deficit bears down on the recovery. In turn, we may see a growing shift within the BoE, and the policy meeting minutes due out on August 17 may show board members Spencer Dale and Martin Weale scaling back their votes to increase the benchmark interest rate by 25bp as the region faces a risk of a double-dip recession. Should these events unfold, the British Pound will certainly struggle to hold its ground, and the sterling may face a sharp sell off as interest rate expectations falter.

Credit Suisse overnight index swaps for the BoE have dipped into negative territory, implying market participants see a greater likelihood for a rate cut over the next 12-months, and sterling may trade heavy over the near-term as market participants price in lower borrowing costs for the U.K.. In turn, we may see the GBP/USD fail to find support around the 23.6% Fibonacci retracement from the 2009 low to high around 1.6200-20, and the pair may threaten the rebound from July (1.5781) should the BoE show an increased willingness to expand monetary policy further. - DS

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