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British Pound to Lose Further Unless the FTSE 100 Bounces Sharply

British Pound to Lose Further Unless the FTSE 100 Bounces Sharply

David Rodriguez, Head of Product

Fundamental Forecast for British Pound: Bearish

The British Pound tumbled to fresh five-year lows in a tough week for financial markets, and there seems to be little to stop it from falling even further. It is nonetheless shaping up to be another big week ahead.

The United Kingdom represents a major global financial hub, and traders punished the British currency as a sudden wave of financial market turmoil sent the US S&P 500 to its worst start to the year on record. Any subsequent rebound for the fast-falling GBP will almost certainly depend on what happens next in global equity markets, and in that sense it will be critical to see how trading begins at the weekly Asian market open. A sharp tumble in Chinese equities acted as the catalyst for the broader global turmoil, and it seems likely that any similar up or down moves could set the pace for global markets once again.

On the domestic front, British Pound traders will look to an upcoming Bank of England interest rate decision for direction. The central bank will almost certainly keep interest rates and its asset purchase program unchanged through its Thursday meeting, but it will be important to monitor the attached minutes to judge the likelihood of future interest rate changes. And indeed, the BoE was as of very recently just one of two G10 central banks expected to raise interest rates in 2016.

Interest rate traders now predict a an approximate 50 percent chance of a Bank of England “liftoff” this year, and this in itself may continue to hurt the British Pound versus the US Dollar and other major counterparts. The following day’s release of Bank of England stress test results may be of some interest. Yet it would likely take a strongly adverse result to force big reactions out of the British Pound and broader UK asset classes.

It is shaping up to be another big week for the Sterling—the key question is whether it can finally stage a meaningful rebound after falling for three of the past four weeks.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.