Fundamental Outlook for British Pound: Bearish

- August Retail Sales crush expectations, print at 3.3% vs. 1.6% forecast
- British Pound unfazed by Surge in CPI as inflation rises to 4.7% in August
- Banking consolidations not contained to the US

The UK calendar is noticeably bare next week, with Pound price action taking its cues from US dollar sentiment. Rightmove House Prices will likely continue to see declines in September as the housing shows now signs of letting up. Indeed, HBOS Plc, the nation’s largest mortgage lender, was forced to sell itself to Lloyds TSB Group Plc to stave off collapse. The metric saw prices fall -4.8% in the year to August, the lowest in at least 6 years. Nationwide’s version of the house price index will follow suit: that figure plunged -10.5% in the year to August, a 9-year low. Meanwhile, the Bank of England remains focused on inflation: Governor Mervyn King argued in favor of taming price growth in a September 16th letter to Chancellor of the Exchequer Alistair Darling citing Augusts’ annualized CPI result at 4.7%, a reading well above the bank’s 2% target level. Still, the market forecasts that the BOE to begin cutting rates in the fourth quarter of this year and expects 100 basis points in easing over the next 12 months.

On balance, Pound price action will likely follow the directional momentum of the US Dollar. The precipitous decline in GBPUSD that saw the pair lose 13.44% in just two months from mid-July has found support at the 1.75 level, the site of a major trend line in place since May 2001. The subsequent corrective bounce has broken above near term resistance at 1.8079, the 23.6% Fibonacci retracement of the 07/15-09/11 selloff. Meanwhile, the US Dollar Index has broken significant support, penetrating below the 23.6% Fibonacci retracement of the most recent rally at 78.25. This suggests the greenback could have more room to retrace in the coming week, opening the door for GBPUSD to rise for a challenger of the 38.2% Fib at 1.8478.

Antonio Sousa is a Currency Analyst for FXCM.