Fundamental Outlook for British Pound: Bearish

- Consumer spending drops for the ninth time in ten months, pointing to a deepening recession ahead
- GBPUSD breaks above 1.50, only to lose its footing later in the week
- Check out our GBP/USD outlook based on technicals, interest rates, and PPP

The global economic calendar fills out next week; but no other G10 currency can compete with the fundamental authority of the data that populates the British pound’s docket. Over the past month, we have seen the sterling built considerable strength against currencies that are considered far better positioned than itself. This has developed along with the general recovery in risk sentiment; because there has been no notable improvements in the UK’s economic checkup recently. This leaves the pound in a precarious position. As fundamentals continue to deteriorate from under the unit, its advance becomes more and more dependent on a fragile and altogether volatile driver. Alternatively, if the need for safety sates the appetite for risk, all of the Kingdom’s economic, interest rate and financial troubles will come rushing back to the forefront. And, considering the level of event risk in the week ahead, there is a lot at stake for fundamental traders.

Without doubt, the top release for the UK calendar (if not the global one) next week is the first quarter GDP report scheduled for release on Friday. A look at the current consensus among economists polled by Bloomberg, the first measure of economic growth for 2009 is expected to report a 1.5 percent contraction on a quarterly basis and a year over year slump of 3.8 percent. The three-month number would be a slight improvement from the previous reading; but it’s the trend we are worried about. A third contraction would mark the longest slump since the one through 1990/91. More than likely though, traders will be more concerned with the annual pace of deterioration. Meeting the forecast would put the economy in a slightly better position than the painful recession back in 1980. Push that slump down below 4.1 percent and the outlook for the UK and its currency will take a very sharp turn for the worst. With our benchmark in mind, we should make our own assumptions of whether the actual number will come in over or under. To do this, we must first consider the lengths policy officials have gone to stanch the bleeding. Bailouts, stimulus packages, tax treatments and nationalizations have no doubt put the economy on a better track than it would have been heading on otherwise. Whether this translates into growth now is questionable. Unemployment is at a decade high, consumer spending has plunged, housing activity is pushing recent record lows, credit availability is as low as it has been in at least 15 years and industrial production is at a record low. Many of these trends carry over from previous quarters, but the intensity is decidedly worse. The market is generally in a bearish state when it comes to the pound, so it is best to prepare for a disappointing read; and be ready for a potentially volatile response to a better than expected outcome.

It would be easy just to hold off and wait for the heavy-hitting GDP numbers crossed the wires late in the week and ignore everything else; but there is a lot of event risk that can trigger volatility or alter the long-term drift of the currency beforehand. This data should not be ignored as it could ultimately have a greater influence on speculation than the growth numbers as they are more timely and/or can alter the future rather than just take stock of the past. Key statements to watch will be the Chancellor the Exchequer Alistair Darling’s budget statement and the BoE minutes. All economic participants in the UK want the policy that has been passed to take effect; and these two events will gauge whether they have and what else is in store if it hasn’t. As for the classic data, we have a plethora of releases. The consumer will be the focus with labour data, credit and spending data on tap; but we will also watch the health of the business sector with the CBI quarterly industrial trends figure as well as the likelihood of seeing stagflation later down the line through the CPI data.

Terri Belkas is a Currency Strategist at FXCM.