Fundamental Outlook for British Pound: Bearish

- UK mortgage approvals jumped during April, according to British Bankers Association
- A CBI survey showed the UK retail sales tumbled in May
- UK house prices rose by the most since 2006 in May, according to Nationwide Building Society

GBP/USD broke clear above resistance at the 38.2 percent fib of 2.0160-1.3503 at 1.6049 on Friday, as the greenback fell sharply across the majors. However, GBP/USD remains very overbought according to daily RSI, and while extremes can hold for days and weeks, the moves suggest the pair could turn lower at any time, making it dangerous to buy into the trend.

There will be a variety of growth-related indicators released next week, as the Purchasing Managers’ Index (PMI) for the UK manufacturing, construction, and services sectors are due out. All of the indexes are projected to improve, but the big question is if they can breach the 50 mark, which would indicate an expansion in business activity. Services PMI was the closest to this level at 48.7 during April, and thus, a better-than-expected result could boost speculation that the UK economy is in for a consumer-led recovery.

On Thursday, the Bank of England is expected to leave rates unchanged for the third straight month at an all-time low of 0.50 percent. Based on the BOE’s last policy statement and the minutes from the meeting, we know that the central bank expanded their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds (which happened to be by a unanimous vote), 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. The minutes also revealed that some members thought that “a case could be made for a larger stimulus,” but the high uncertainty of QE led them to believe that there was “no pressing need for the larger extension” at that point. 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, though the markets are just as likely to show no reaction in this case.

Antonio Sousa is a Currency Analyst for FXCM.