Fundamental Outlook for British Pound: Bearish

- UK Inflation Unexpectedly Rose In February to 3.2%
- Retail Sales Fall To Lowest Level Since 1995
- U.K. GDP Contracted By The Most Since 1980

The British Pound has come under pressure as the U.K. economic recession continues to deepen. The only bullish data for the currency was a unexpected increase in February consumer prices to 3.2% from 3.0% which put inflation back above the BoE’ 1-3% target range. However, Governor Mervyn King quickly dismissed the numbers as a by product of recent sterling weakness and held to the central’s banks predictions that inflation would eventually undershoot their target. The 4Q GDP figures were revised lower to -1.6% from 1.5% as the economy contracted by the most since 1980. Retail Sales in February falling to their lowest level since 1995 gives little hope that the U.K. economy can look to domestic growth to help lift them from the current downturn. A deepening recession and falling prices has kept deflation concerns alive and may force the MPC to consider increasing the amount of quantitative easing that they implement.

The U.K. PMI readings for manufacturing and services are expected to slightly improve to 35.0 and 43.5 from 34.7 and 43.2 respectively. However, both sector will have contracted for an eleventh month putting off any hopes of a recovery until 2010. Additionally, consumer confidence, and mortgage approvals are expected to remain near record low levels while house prices are forecasted to drop another 1.5%. The dour fundamental data will put greater importance on the success of the central banks efforts to stimulate lending. However, the central bank has had mixed results with their Gilt auctions which has led them to scale back their efforts a bit, which is disappointing markets and increasing fears that their efforts may not have the predicted impact.

Sterling/dollar has found support at the 50-Day SMA at 1.4266, a break below the technical level could lead the pair to test 1.400. The 100-Day SMA capped the Pound’s gains midweek and if bullish sentiment should return the level may remain formative. Until we see a clear break above that level downside risk will remain for the pair.

David Rodriguez is a Currency Analyst at FXCM.