Fundamental Outlook for British Pound: Bearish

- Rightmove House prices fell by 0.4% in June, which was the first decline in five months
- The British Banker’s Association reported an increase in mortgage approvals in May to 31,162, the highest since April 2008
- OECD lowered its growth forecast for the U.K. to -4.3% from -3.7%

The British pound finished the week on a positive note after a week of choppy price action as it found support on a pick up in risk appetite. The first decline in house prices in five months raised question’s over the scope of a U.K. recovery and led to sterling weakness to start the week. The OECD downgrading their growth outlook for the U.K. economy to -4.3% from -3.7% added to the dour outlook for the economy. A mid week head & shoulder’s pattern and a break below the 20-day SMA appeared that the pound was head for a significant retrace before it regained its footing.

The BoE warned on Friday that the banking system is still vulnerable to any new economic or financial tensions and that banks will need to be able to survive without government help. It expressed concerns about the ability of banks to extend enough credit to support economic growth if new market strains appeared. Additionally, the central banks cautioned lenders that the level of government aide will dwindle as it becomes less effective, leaving them to fend for themselves. Therefore, if we see the pace of the recovery slow then the downside risks could increase exponentially which may sink the pound.

The UK economic calendar will give us some insight into the pace of the recovery and the depth of the hole that it finds itself in. Final 1Q GDP figures are expected to be revised lower to -4.3% from -4.1% as the recession deepened during the period. Preliminary GDP readings showed a 12.1% drop in total production which was already double the decline from the fourth quarter. Forward looking forex traders may not put too much stock in the past performance but the upcoming PMI readings will definitely garner their attention. The manufacturing gauge is expected to improve for a fifth straight month to 46.4 from 45.4, which would be the highest level since July 2008. However, the service sector is forecasted to fall to 51.5 from 51.7 which is similar to what we saw in the Euro-Zone figures. Yet, the sector accounts for mush more of the U.K. economy which can be as much as 70% and may have a greater impact on sentiment. If we see an upside surprise in the service data then we could see sterling continue its gains with a test of 1.665 the 6/3 high. Meanwhile, weakness in both sectors could be the catalyst for a pound tumble which we have been expecting. The GBP/USD has been supported by the 20-day SMA and a clean break below that level would be a strong signal of more bearish potential with a possible test of 1.600.

Jamie Saettele is a Technical Currency Analyst for FXCM.