Fundamental Outlook for British Pound: Bearish

- UK trade deficit, jobless claims show signs of improvement
- UK industrial, manufacturing output declines start to slow
- Bank of England Quarterly Inflation Report triggers steep GBP losses amidst worsening outlook

The British pound wrapped up the past week down against the US dollar and Japanese yen, but up versus the rest of the majors. Looking to GBP/USD specifically, the pair remained contained within the same rising channel it has traded within for nearly a month, despite the bleak fundamental outlook for the UK. That said, there will be a variety of triggers for a GBP/USD breakdown next week, as inflation data and central bank-related news tends to spur volatility.

On Tuesday, the UK’s consumer price index (CPI) reading for the month of April is expected to rise 0.4 percent, the third straight increase. However, the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to a more than one-year low of 2.4 percent from 2.9 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but above their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further. On the other hand, if CPI holds strong, the currency could rally in response.

On Wednesday, the minutes from the Bank of England's May 7 meeting may not be as market-moving as they've been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). Indeed, we already know that the BOE has decided to expand their quantitative easing program by 50 billion pounds to 125 billion pounds, that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. However, the growth and inflation outlook published in the BOE’s Quarterly Inflation Report suggests that the central bank may be open to expanding their quantitative easing program later on. If the minutes from the BOE’s most recent meeting reiterate this, the British pound could pull back very sharply.

Terri Belkas is a Currency Strategist at FXCM.