British Pound May Weaken on Profit-Taking, Year-End Flows

Fundamental Forecast for the British Pound: Neutral

• British Pound gains for sixth week as monetary policy outlook improves
• Thin UK data docket, status-quo BOE FSR may leave prices rudderless
• Profit-taking, year-end flows may drive Pound lower in the week ahead

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The British Pound recovery continued as prices posted the sixth consecutive weekly gain versus an average of the UK unit’s major currency counterparts. An increasingly benign BOE policy outlook appears to be the catalyst driving recent gains. Prices have advanced alongside OIS- and futures-based measures of expectations for next year’s policy path as well as benchmark 10-year Gilt yields.

Last week, a revised set of third-quarter GDP figures underscored the economy’s relative resilience since the Brexit referendum. An expansionary Autumn Budget Statement also appeared to shift some of the burden of supporting the economy from monetary and toward fiscal policy. Traders appeared to interpret this as reducing scope for further BOE accommodation.

Looking ahead, November’s manufacturing and construction PMIs as well as October’s Mortgage Approvals report headline an otherwise lackluster data docket. UK economic news has cautiously deteriorated relative to consensus forecasts since the beginning of October but more of the same seems unlikely to beckon easing by itself as inflation firms and the government readies its own stimulus.

Meanwhile, the BOE Financial Stability Report seems unlikely to offer anything particularly novel. Credit conditions have appeared to be broadly stable since mid-August since recovering from a slump in the referendum’s immediate aftermath. This means that the central bank is probably comfortable in wait-and-see mode for the time being, saving its ammunition for the possibility that something truly worrisome transpires.

On balance, this leaves Sterling somewhat rudderless. The currency has enjoyed the longest winning streak since mid-2015, which may inspire jittery investors to consider profit-taking amid a lull in top-tier news flow. Year-end portfolio readjustment that tends to play out across financial markets in the month leading up to winter holidays and the turn of the calendar year may reinforce this dynamic.