Fundamental Outlook for British Pound: Bearish

-- BOE October meeting minutes show unanimous vote for 50bp cut, raises risks for more on November 6
-- UK retail sales slump as rising unemployment, tight credit conditions weigh on consumption
-- UK Q3 GDP confirms recession fears – GBP sees biggest intraday decline in at least 37 years

After seeing its biggest intraday decline in at least 37 years amidst recessionary UK GDP figures on October 24, the British pound has potential to rebound somewhat this week, but economic data may not play much of a role in that. Indeed, given the 0.5 percent drop in Q3 GDP, which confirmed a contraction in the economy, speculation has increased that the Bank of England will cut rates by at least 50bp at their next meeting on November 6, if not by 100bps. With Credit Suisse overnight index swaps pricing in nearly 200bps worth of rate cuts over the next 12 months, an aggressive reduction next month doesn’t seem out of the question. However, according to Technical Strategist Jamie Saettele, last week’s ATR reading for GBP/USD was one of the largest ever. With ATR’s of similar magnitude leading to significant turns in the 1990’s and earlier this decade, the moves suggest that it may be time to start looking for indications of a bottom in the pair.

Data-wise, things are likely to remain bleak in the UK. In fact, Nationwide house prices are forecasted to fall negative for the twelfth consecutive month as the housing collapse continues while mortgage approvals are likely to reflect similar sentiment. Meanwhile, CBI Distributive Trades may reveal negative sales yet again, especially since PMI manufacturing for the UK has held below 50 (signaling contraction) for five consecutive months. Finally, GfK consumer confidence is forecasted to slip to -36 from -32 amidst the financial market crisis and economic slowdown. Overall though, price action over the past few weeks has shown that fundamentals aren’t playing a huge role in the currency markets unless there is a significant release like GDP. Since that risk looms on the US side of the equation, GBP/USD could finally see a bit of a reversal this week, barring something completely unexpected like an inter-meeting BOE rate cut.

Jamie Saettele is a Technical Currency Analyst for FXCM.