Fundamental Outlook for British Pound: Bearish

- UK inflation pressures appear to be easing rapidly, as UK CPI fell by the most on record to an annual rate of 4.5%
- The minutes from the Bank of England’s November meeting suggest additional rate cuts are on the way
- UK retail sales fall less than expected, but Credit Suisse OIS still price in a 75bp reduction to the UK Bank Rate in December

The British pound spent much of last week consolidating above the November 13 lows of 1.4557, but left little indication of whether the next move would be a correction higher or a break down towards the next key level of support at 1.4050. One thing is obvious though: the long-term trend for the British pound remains bearish. As of Friday’s close, Credit Suisse overnight index swaps were fully pricing in a 75bp rate cut by the Bank of England in December. Such a move would bring interest rates down to their lowest level since 1932, and seems entirely feasible as CPI has finally started to show signs of falling while the economy has fallen into recession.

This will only be reiterated on Wednesday when the second reading of UK GDP for the third quarter will hit the wires. The initial reading of -0.5 percent is not expected to be revised, but would still be the worst result in nearly 18 years. Furthermore, there are downside risks for this particular report as nearly every sector of the UK economy has experienced a contraction in activity. Other economic indicators that could garner some attention this week include UK Nationwide House Prices, which are anticipated to fall negative for the 13th consecutive month, while GfK consumer confidence is likely to tip lower and could even target July’s record low of -39.

Overall, risk trends are ultimately in control of the forex markets at this juncture, and if equities find some sort of intermediate bottom in the near-term, relatively "risky" assets including the British pound could stage a rebound. Traders should be cautious though, as the trend remains overwhelmingly in favor of dollar bulls.

Terri Belkas is a Currency Strategist at FXCM.