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British Pound Shows Signs of Life – Can it Continue Higher?

British Pound Shows Signs of Life – Can it Continue Higher?

David Rodriguez, Head of Product

Fundamental Forecast for British Pound: Bearish

The British Pound finally showed signs of life as it recovered from multi-year lows to finish the week higher versus the Euro and the US Dollar. It was the first week in four in which the GBP rallied versus the Greenback and the first time in eight it gained versus the Euro. What are the odds it will recover further off of recent lows?

A relatively uneventful week for UK economic data did little to boost the Sterling versus major counterparts, but the upcoming release of first estimates for Q4, 2015 UK GDP growth could force notable volatility in the GBP on major surprises. Analysts estimate the UK economy grew by 0.5 percent in the final three months of the year—marginally better than the 0.4 percent growth rate seen in Q3. Yet the year-over-year pace of expansion is likely to fall to multi-year lows at 1.9 percent. And therein lies a key driver of British Pound weakness: lackluster UK economic fundamentals offer little reason to buy into such a sharp downtrend.

Global financial market turmoil nonetheless remains the largest single driver of GBP weakness, and further pressure on key markets may only exacerbate pressure on the British currency. The UK financial sector comprises approximately eight percent of total GDP, while total financial services exports account for another 13 percent of national accounts. Both of these key stats put Britain proportionately above all other G7 economies, and this in itself underlines why movements in the British currency remain closely linked to global markets.

Whether or not the GBP continues to recover from recent lows will largely depend on continued recoveries from bellwethers such as the US S&P 500 and Chinese CSI 300. We’ll keep an especially close eye on price action on Sunday night’s Asian session, as big moves can and have set the pace for the rest of the week.

UK economic fundamentals certainly matter, and the upcoming release of Q4 growth figures could quite easily force short-term volatility. Yet the larger GBP trend remains closely linked to outlook for global financial markets.

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