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British Pound Outlook Threatened By Slower Growth, Inflation

British Pound Outlook Threatened By Slower Growth, Inflation

2012-04-07 00:41:00
David Song, Strategist
British_Pound_Outlook_Threatened_By_Slower_Growth_Inflation_body_Picture_5.png, British Pound Outlook Threatened By Slower Growth, InflationBritish_Pound_Outlook_Threatened_By_Slower_Growth_Inflation_body_Picture_6.png, British Pound Outlook Threatened By Slower Growth, Inflation

Fundamental Forecast for British Pound: Bullish

The British Pound bounced back during the holiday trade to maintain the upward trend from earlier this year, but we may see the sterling struggle next week as the economic docket is expected to reinforce a weakened outlook for the U.K. As the event risks on tap for the following week are anticipated to dampen the prospects for growth and inflation, a slew of dismal developments could spark a sharp selloff in the exchange rate, and we may scale back our bullish forecast for the GBPUSD should the exchange rate slip back below interim support around 1.5800.

At the same time, we will be closely watching the fresh batch of commentary from Bank of England official Adam Posen as he continues to push for another GBP 25B in quantitative easing, but we may see the board member soften his dovish tone for monetary policy as the central bank anticipates to see a more robust recovery later this year. Although the Monetary Policy Committee refrained from releasing a policy statement after maintaining its current policy stance in April, the board said it would take another month to complete the GBP325B in bond purchases, but it seems as though the MPC is looking to conclude its easing cycle this year as the committee now see a limited risk of undershooting the 2% target for inflation. Indeed, the shift in the policy outlook should continue to prop up the sterling as market participants scale back bets for more quantitative easing, and we may see the British Pound outperform against its major counterparts as interest rate expectations pick up.

As the GBPUSD appears to be carving out a higher low around 1.5800, the pair could be building a base for a sharp move to the upside, and we may see the exchange rate make another run at 1.6000 should the developments coming out of the U.K. dampen expectations for more QE. In turn, it looks as though the upward trending channel will continue to take shape in April, and we will maintain a bullish outlook for the British Pound as the BoE raises its fundamental assessment for the region. – DS

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