Fundamental Outlook for British Pound: Bullish

- The UK’s CBI retail sales report surprisingly surged into positive territory to a 15-month high
- UK mortgage approvals fall to 26,097 in March, down 25% from a year earlier
- UK manufacturing PMI rocketed to 42.9 in April from 39.5, signaling that the contraction continues, albeit at a slower pace

The British pound was the second strongest of the majors last week, losing out only to the Canadian dollar, as GBP/USD bounced from support at the 100 SMA. While there is resistance looming above for the pair at the April 16 high of 1.5070, economic releases could work in favor of British pound gains in the near-term.

On Tuesday, UK construction PMI is projected to rise to 31.9 for the month of April from 30.9, which would mark the second straight increase. However, this also leaves PMI very close to the record low reached in February, and highlights the fact that the UK housing sector is likely to remain deadweight for the broader economy. Meanwhile, Nationwide consumer confidence could rise to 43 for the month of April from 41, suggesting that the signs of market stabilization and the government’s stimulus plans have helped to improve sentiment.

On Wednesday, UK services PMI is anticipated to increase for the fifth straight month in April to 46.3 from 45.5, adding to evidence that confidence is rising. The biggest event risk by far, though, will come on Thursday as the Bank of England is expected to leave rates unchanged for the second straight month. Indeed, both Credit Suisse overnight index swaps and a Bloomberg News poll of economists reflect forecasts that the BOE will leave the Bank Rate at an all-time low of 0.50 percent at 7:00 ET on Thursday. A look at the minutes from their April policy meeting showed that the MPC voted unanimously in favor of leaving the Bank Rate at 0.50 percent and to continue their quantitative easing (QE) program. They also said that there was a "high degree of uncertainty" over the amount of asset purchases that would be necessary to keep inflation at target, and if "the evidence warranted it," the Committee could reduce or expand their program. Ultimately, how the British pound responds will likely depend on the BOE’s QE stance. Signs that the BOE may increase their gilt purchases could weigh heavily on the British pound, especially against the euro, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency.

Of course, traders should keep in mind the status of risk appetite since the British pound tends to sell off during times of flight-to-quality, and a resurgence in the US dollar could pull GBP/USD back toward 1.4500.

Antonio Sousa is a Currency Analyst for FXCM.