Fundamental Outlook for British Pound: Neutral

- UK CPI fell to an annual rate of 1.8% in June, putting inflation below the BOE’s 2% target
- UK jobless claims rose for the 16th straight month in June, ILO unemployment rate hits 12-year high
- The IMF warned that the British pound faced risks unless PM Brown curbed the UK’s budget deficit

The British pound may have ended the past week up against the US dollar and Japanese yen, but the UK’s national currency ultimately fell against the rest of the majors amidst rising jobless claims and warnings from the IMF that the UK’s budget deficit threatened to hurt the pound. Overall, sentiment on the nation remains extremely bleak. So bleak, in fact, that Prime Minister Gordon Brown won the support of the UK’s two main opposition parties to force banks to defer half of the bonuses given to their top executives for five years as the backlash against the financial sector continues.

Economic data due out this coming week threatens to hurt the British pound as well, but the big question is if news can lead GBPUSD to break out of its large range of 1.60-1.66. The release of the minutes from the Bank of England's July 9 meeting at 4:30 ET on Wednesday may not be as market-moving as they've been in the past since comments are likely to be fairly neutral. Nevertheless, economic conditions in the UK remain bleak, as the final reading of Q1 GDP for the UK was unexpectedly revised down to an annual rate of -4.9 percent, the lowest since recordkeeping began in 1956, from -4.1 percent. This leaves GDP at the bottom of the BOE’s previous range of forecasts, which has left speculation that the central bank will expand their quantitative easing (QE) program to fester. As a result, if there are signs within the minutes that this is occurring, the British pound could take a hit.

On Friday, the 04:30 ET advanced reading of Q2 GDP for the UK is forecasted to contract for the fourth straight quarter at a rate of -0.3 percent, which could drag the year-over-year rate down to a fresh record low of -5.2 percent from -4.9 percent. The UK has been hit particularly hard by the credit crunch since the country was considered to be one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. Overall, a greater-than-expected decline could lead the British pound lower as the data would raise the odds that the Bank of England will expand their quantitative easing efforts. On the other hand, if GDP is a bit better than forecasts, the currency could surge.

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