Fundamental Outlook for British Pound: Bearish

- UK bails three banks as 500 billion pound bailout plan put into action quickly
- Unemployment claims rise to near two-year high as recession begins to take hold
- BoE says it will delay reporting those banks seeking emergency funds to avoid panic

Event risk promises a volatile week for the British pound should risk trends give way to normal market operations when liquidity returns to the market. And, without doubt, the most market-moving piece of data for the sterling (and likely the entire currency market) will be the advance reading of third quarter GDP. With the housing market collapse hitting a new stride, trade deficits ballooning to records, lending essentially evaporating and consumer spending souring with confidence, the 0.2 percent contraction forecasted for Europe’s second largest economy may ultimately prove modest. This would technically only be the first quarter of negative growth – a line that many Euro Zone members have already crossed in the period through June. Nonetheless, this would be the first contraction in growth for the UK in 16 years and recent data would easily bridge the gap for a technical recession. Obviously, this data would have a considerable impact on the pound – with a integral role in driving interest rate speculation – but this data will further have an impact on the entire currency market. As the first of the G7 economies to release its growth numbers, this indicator will confirm or deny growing forecasts that the world economy is heading toward recession.

Before the 3Q growth number hits the wires and absorbs the entire Forex market, sterling traders will have plenty of event risk to trade against. Starting things off immediately through Sunday’s illiquid hours with the Rightmove House Prices gauge. As the leading sector indicator, this report may generate interest; but the actually influence it has on price action will be limited as the market is already well aware of the housing recession n the United Kingdom. Perhaps more interesting though will be Thursday’s BBA home loans report for September. This indicator is not only leading housing indicator; but it is also a key measure for consumers’ demand for credit and their level of confidence. Net public borrowing figures on Monday will give a similar reading for rotating loans. Elsewhere, reports on both manufacturing and retail sector health will offer last minute adjustments to speculation on the GDP report. However, we shouldn’t expect much of a reaction form the markets to either of these reports. The CBI quarterly industrial trends report is a broad reading of factory activity, but its proprietary release renders its an impotent indicator. For most currencies, governmental retail sales readings are often top market movers; but for the UK, the data is volatile and even the BoE has said it was paying the data little heed when deciding monetary policy.

Antonio Sousa is a Currency Analyst for FXCM.