Fundamental Outlook for British Pound: Neutral

- U.K. GDP contracted by 5.6% annually, which was the most since records began in 1955
- U.K. Retail Sales rose more than expected by 1.2%, Led by a 4.7% increase in textiles
- BoE voted 9-0 to keep rates and QE measures unchanged

The British pound ended a week of choppy price action heading lower as the 2Q GDP preliminary reading showed a deeper than expected contraction of 0.8% against expectations of 0.3%. Economic growth on the year dropped by a 5.6% which was the most since record keeping began in 1955. The growth figures raise concerns that the BoE would need to add to their quantitative easing efforts in order to ensure an economic recovery. The release of the MPC’s minutes from the July meeting showed that after considering additional measures the committee unanimously voted to stand pat but would review their alternatives again in August when they release their quarterly inflation report. A 1.2% increase in retail sales spurred hope that domestic consumption would start to improve as non-food sales rose 1.6% pointing to an increase in discretionary spending. However, elevated unemployment levels and the service sector declining by 1.0% in the second quarter will make future growth challenging.

Although the drop in growth is alarming, the improving outlook for the global economy which was evident in the massive rally in equities during the week could keep the MPC on hold. Bank of England Deputy Governor Charles Bean said this week that the economy may have stopped shrinking which could signal the potential for an improvement in the central bank’s growth estimates when they release their latest report on August 12. The growth numbers and the corresponding inflation outlook will determine the future course of action.

The economic calendar this week will give us further insight into the U.K. housing market and prevailing credit conditions. The Nationwide Building Society is expected to show that house prices rose 0.2% in July as thawing credit markets are underlining demand. Indeed, mortgage approvals are forecasted to rise to 47,000 from 43,400 in June which would be the highest since April, 2008 but still far below the ten year average of 97,000. The BoE lending report mortgage lending was showing sign of improving but that credit for consumers and businesses remains a challenge. The GBP/USD has been trading at the top of its recent range of 1.6000-1.6700 which could leave it susceptible to a move lower. However, we have seen solid near-term support from the 20-Day SMA at 1.6371, which is starting to converge with the 50-Day SMA at 1.6260- a level that has held since March.

DailyFX provides forex news on the economic reports and political events that influence the forex market.