Fundamental Outlook for British Pound: Bearish

- UK jobless claims rose for the 12th straight month to a nearly 10-year high of 1.23 millon
- BOE Governor King says UK economy is in for “deep recession”
- BOE forecasts that CPI will drop “well below” 2 percent, GDP to contract sharply

The British pound finished the week lower against the US dollar, as comments by Bank of England Governor Mervyn King and the minutes from the central bank’s last meeting added to evidence that another rate cut was on the way. Looking ahead to this coming week, the currency could remain under pressure unless a surge in investor confidence propels “risky” assets higher. In economic news, the release of UK CPI could weigh on the British pound as the annual rate of growth is anticipated to slow to 2.6 percent from 3.1 percent, putting inflation back within the Bank of England’s target range of 1 percent - 3 percent. However, with the BOE expecting that CPI could fall “well below” 2 percent in the first half of the year, such a decline may only be the first in a series.

Meanwhile, the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 4:30 ET, and the February 18 report is unlikely to be any different. During the February meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected. However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King’s comments have signaled otherwise and if the MPC’s comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back.

Finally, Friday’s UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn’t read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.

From a technical perspective, there are essentially two clear “lines in the sand” that may dictate whether or not we will see a bearish or bullish break. Indeed, the 1000 point range of 1.4135 - 1.5000 has contained GBP/USD so far, and traders should keep an eye on those levels as a break above or below may signal sharper moves to come.

Antonio Sousa is a Currency Analyst for FXCM.