British_Pound_Rally_Threatened_By_BoE_Inflation_Report_Slower_Growth_body_Picture_5.png, British Pound Rally Threatened By BoE Inflation Report, Slower GrowthBritish_Pound_Rally_Threatened_By_BoE_Inflation_Report_Slower_Growth_body_Picture_6.png, British Pound Rally Threatened By BoE Inflation Report, Slower Growth

Fundamental Forecast for British Pound: Bearish

The British Pound surged higher on Friday to maintain the range carried over from earlier this month, but the slew of event risks on tap for the following week is likely to weigh on the exchange rate as the developments are expected to instill a weakened outlook for the U.K. Indeed, the Bank of England quarterly inflation report highlights the biggest event risk for the Pound, and we are likely to see the central bank strike a dovish tone for monetary policy as the region faces an increased risk of a double-dip recession.

Although the Monetary Policy Committee maintained its current policy in November, the central bank may see scope to expand the Asset Purchase Facility beyond the GBP 275B target as the slowing recovery in Britain dampens the outlook for price growth. In turn, the report could highlight an increased risk of undershooting the 2% target for inflation, and the BoE may show a greater willingness to carry its easing cycle into the following year in order to stem the downside risks for the economy. Beyond the quarterly inflation report, jobless claims in Britain are expected to increase for the eighth consecutive month in October, while the headlines reading for U.K. inflation is anticipated to fall back from an annualized rate of 5.2%. In addition, retail spending is projected to weaken 0.3% during the same period, and the batch of negative developments is likely to weigh on the exchange rate as market participants see more quantitative easing on the horizon.

As the 200-Day SMA (1.6137) continues to serve as near-term resistance, we should see the GBP/USD trend sideways ahead of the economic event risks, but the sterling may fail to support around 1.5900 as the fundamental outlook for the U.K. deteriorates. As a result, the exchange may fall back towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680-1.5700, but a break below could threaten the rebound from 1.5273 as the pair appears to have carved out a top in November. DS