Fundamental Outlook for British Pound: Bearish

- British Economy Confirmed to be in worst slowdown since 1991
- View our Monthly British Pound/US Dollar Exchange Rate Forecast
- UK Nationwide Home Prices fall further – Is there an end in sight?

British trading markets next look forward to the Bank of England’s contentious interest rate announcement on the fourth of December. According to a Bloomberg News survey, economists and analysts predict that the BoE Monetary Policy Committee will cut rates by a massive 100 basis points. Following a dramatic downward revision to growth and inflation forecasts through their November inflation report, most believe that officials are prepared for a similarly significant monetary policy adjustment. Yet it is interesting to note that Overnight Index Swaps—a tool used to speculate on and hedge against official rate moves—are actually pricing in a more moderate 75 basis point move. Needless to say, trading markets are geared up for strong moves and rhetoric from the central bank. The extent to which BoE officials stress negative outlook for growth and inflation will likely determine commensurate reactions out of currencies and other asset classes.

In normal times, currency traders would most often reward currencies with high domestic real yields and bullish rate expectations. Yet the opposite has been true through the ongoing financial crisis, and how the British pound will react to a 100 basis point interest rate cut is anyone’s guess. There is a great deal of uncertainty surrounding British Pound forecasts, but the coming week should go a long way in clarifying our own bias for the British currency.

David Rodriguez is a Currency Analyst at FXCM.