Fundamental Outlook for British Pound: Bearish

- Mortgage Approvals Remain Near Lowest Levels In 11 Years, The BBA Showed an increase to 22,448 from 22,369.
- Consumer Confidence Remained Near A Record Low, Improving From -39 to -36 according to Gfk.
- The CBI Distributive Trades Gauge Reported A Decline in Retail Sales Volume to Its Lowest Level On Record.

The British pound would fall another 300 points falling to a 25 month low, as the second quarter flat growth reading reported the week prior would set the tone for Sterling sentiment. Consumer confidence and home mortgages mildly improving didn’t to anything to change the mind of Pound Bears. Meanwhile, the CBI retail trade report setting another record low of -46 following the previous month’s record of -36 would convince traders that the country was heading for a recession.

The upcoming BoE rate decision will be one the most difficult for policy makers as the evidence mounts that the country is fast approaching a recession, while inflation remains far beyond the MPC’s 3% threshold at 4.4%. Although easing oil prices have reduced price pressures, costs will have to fall significantly to get near the 2% target. Following the last policy decision Governor King forecasted the slowing growth would bring consumer prices under their target in two years which opened the door for a future rate cut. However, all 61 economists surveyed by Bloomberg are predicting a rate hold at the next policy meeting. Therefore, the rate decision may not provide that much event risk as it isn’t accompanied by a statement, leaving the markets to speculate on the tally until the minutes are revealed on September 17th. The major event risk for the Sterling will come from the PMI manufacturing and services reports. Since, both are expected to slip further into contraction we could see the GBPUSD look to test support at 1.8182 the 7/18/2006 low. Trading at theses historic low levels sets the cable up for a retracement, especially of traders have priced in a rate cut and are disappointed when the BoE disappoints.

David Rodriguez is a Currency Analyst at FXCM.