Fundamental Outlook for British Pound: Bearish

- UK Consumer Confidence Hits Record Low, Says Nationwide
- Producer Prices Fall Again in December, Threatening Deflation
- Bank of England Cuts Interest Rates to 1.50%, The Lowest Ever

The Trade Balance report headlines the economic calendar in the week ahead, with expectations calling for the deficit to narrow in November to -£7.5 billion. The rapid depreciation of the British Pound is likely to be a key contributor, making UK products substantially cheaper for overseas buyers and boosting exports. Indeed, Sterling lost 3.26% against the Euro and 2.87% against the US Dollar in November. Cumulatively, the US and the Euro Zone account for well over 60% of all UK cross-border sales. Meanwhile, imports have likely declined as consumers cut back spending on both domestic and foreign-made products. Last week, we saw consumer confidence fall to a record low as economic growth turned sluggish, sending unemployment higher all the while tumbling home values and stock prices produced large negative wealth effects. These very trends are up to be on display again both with December’s BRC Retail Sales Monitor and RICS House Price Balance survey, with the latter expected to show that 74% of those polled reported falling property values.

Despite dour economic data, the British Pound has room to rise in the near term. Sterling notably diverged from the other majors in December as the only currency that lost ground to the US Dollar, weighed down by expectations of aggressive Bank of England interest rate cuts. Mervyn King and company notably shied away from explicitly promising further easing when they took rates to 1.50% last week, and the markets clearly took notice: trading in overnight index swaps suggests traders pared bets on further easing by over 50% since the rate decision. Considering the economic calendar is not set to offer anything blatantly worse than what has already been priced into the exchange rate, the present moderation in rate cut expectations (even if temporary) gives sterling some room for a corrective upswing.

Jamie Saettele is a Technical Currency Analyst for FXCM.