Fundamental Outlook for British Pound: Bullish

- The Bank of England kicks off its quantitative easing effort with a successful 10.5 billion pound purchase
- Industrial production shrinks the most in 28 years as the global recession weighs heavily on the United Kingdom
- UK Finance Minister Alistair Darling takes world’s policy officials to task to stabilize world’s markets and economy

The British pound has recovered some ground against the benchmark dollar; but not enough to put it out of harms way next week. In fact, the GBPUSD pair is just a few hundred pips off a long-term triple bottom that spans all the way back to 1985; and few would disagree that the sterling’s long-term trend is bearish. Clearly technical traders are deferring to fundamentals to make a decision on direction as the ultimate move the market makes could redefine the long-term trend. The week ahead holds critical fundamental influence; and could therefore catalyze the break pound traders have been waiting for.

Redefining a trend is not the job of a single indicator or a shift in market sentiment. To put the pound into multi-decade lows or in a true bullish reversal we will need to see the fog surrounding financial and economic fears lift. Market health is a genuine global phenomenon now; and the advantages of one economy’s investments versus another is largely based on the health of the economy. Considering the market consensus for the UK through 2009, this is a bad position to be in. The IMF has projected the UK’s 2009 recession would be the worst in the industrialized world. However, large institutions are often the last to come to such realizations; and the market has already priced in what may be the worst of the dour forecast. In fact, the pound may be oversold as the market has lowered its expectations relative to the UK’s counterparts. Over the past months, the government has made aggressive strides to correct its deep slump. Quantitative easing, nationalization and large stimulus funds speak to officials commitment to genuinely turning the economy around. This contrasts the Euro Zone’s inability to come to region-wide solutions or Japan’s political problems in passing necessary aid. This means that one of the biggest hurdles to the pound’s rebound is sentiment. Should the G20 meeting this weekend end with little in the way of global results, a case-by-case evaluation of economic potential may find the UK in good light.

While a lot rides on the UK’s future relative to its global counterparts, an active economic docket will ensure that news and policy in other economies won’t be the only driver for pound price action. The top event risk for the coming week lies in Wednesday’s combined release of the BoE minutes and employment data. The government’s assessment of economic activity will almost certainly be dim especially with Government King sounding so glum recently. However, the employment numbers are less objective and will give a genuine benchmark for growth potential through the first half of the year. Steady job losses will equate to a drop in consumer spending and therefore, deeper contraction in economic activity. The other notable releases for the week will be the Rightmove House Prices indicator and public lending figures. Both have an obvious influence on growth forecasts; but they will further offer a loose measure of credit activity – an essential gauge for an economy that is already relegated to the worst of the economic recession and financial crisis.

John Kicklighter a Currency Strategist at FXCM.