Fundamental Forecast for British Pound: Bearish

- UK House Prices Rose for Third Straight Month in April, Says Rightmove
- Retail Prices Turned Negative for the First Time Since 1960 in March
- Unemployment Rate Rises to Highest in Over a Decade
- UK Budget Deficit Tripled, Rising to 90 billion Pounds in 2008
- Gross Domestic Product Shranks 1.9% in the First Quarter, Most in 30 Years

The British Pound is likely to look past an uneventful economic calendar to be driven lower by a reversal in risk trends across global financial. The sterling’s average value against a trade-weighted basket of global currencies is now 83.2% correlated with the MSCI World Stock Index, a composite of global equities’ performance. For its part, the MSCI metric began last week with a sharp reversal lower from resistance at the top of a falling channel that has contained prices since October 2008. Stocks inched higher for the remainder of the week, managing to re-test resistance but failing to close above it by Friday’s close. If this was merely a correction to re-test resistance, a return to bearish momentum awaits in the week ahead that is sure to take the British Pound along for the ride. Some upside risk does remain, however, on the heels of cautiously optimistic rhetoric from the G7 summit in Washington, DC.

Looking at the data docket, Gfk Consumer Confidence is expected to continue to advance for the fourth consecutive month in April, rising to -28 from -30 in the previous month. The news is hardly encouraging, however, even if we assume that the metric has put in a bottom despite rising unemployment. Looking at a comparable period of low consumer confidence during the 1990-91 recession, we see that the GfK metric reversed upward in March 1990 but GDP follow suit only 6 months later and did not return to positive growth for a full two years down the road. The absence of expanding output will mean that the central bank is likely to maintain a very loose monetary policy, holding the British Pound back against the currencies of countries where economic growth and by extension interest rates will head higher sooner (most notably the US Dollar). Turning to the housing market, any immediate impact from small improvements in March Consumer Credit and Mortgage Approval readings may be offset with Nationwide expected to report that property prices turned lower in April to shrink at an annual pace of -15.8%. The survey would conflict with a similar report by Rightmove, but its later release suggests a more accurate reading on what April’s housing market actually looked like.

Antonio Sousa is a Currency Analyst for FXCM.