Fundamental Forecast for British Pound: Neutral

- British Pound Dives as Bank of England Boosts Quantitative Easing
- Higher Producer Prices report fails to lift GBPUSD
- View our Monthly British Pound Exchange Rate Forecast

The British Pound finished the week nearly unchanged against the resurgent US Dollar, as an impressive GBP rally gave way to a sharp reversal on surprise Bank of England announcements. BoE officials took markets by surprise in announcing an expansion to their Quantitative Easing measures, boosting the total size of their asset purchase program by a further £50 billion to £175 billion. Forex traders instantly showed their displeasure with the announcement and sent the GBPUSD over 200 pips lower in the short moments following the release. Few were willing to subsequently buy into the GBP declines, and indeed the suddenly-downtrodden currency pair fell even further on to finish the week’s trade. Short-term GBPUSD momentum points to further losses, but it will be important to monitor financial market follow-through and key UK and US economic event risk.

The combination of surprise Bank of England announcements and a data-driven US Dollar reversal meant that the GBPUSD finished lower despite sharp equity market rallies. Yet the medium-term correlation between the Sterling/US Dollar exchange rate and the UK FTSE 100 index continues to trade near record-highs, and we suspect that financial market risk sentiment will resume driving both the Pound and the US Dollar in the days ahead. Financial markets will look to upcoming UK housing and labor market data with particular interest, while a US Federal Open Market Committee rate decision looms large over all US Dollar pairs.

Recent UK economic data has broadly shown relative improvement in domestic activity and said trend will be put to the test by upcoming Jobless Claims results. Consensus forecasts call for a 28.0k increase in Jobless insurance claims and a marginal increase to the national jobless rate at 4.9 percent. The result would represent the worst unemployment since 1997, but as recent market reaction to US Nonfarm Payrolls data clearly shows, financial markets are mostly interested in the rate of deterioration. The S&P 500 surged on news that the US economy lost “only” 247k jobs in the month of July, and we would expect similar reactions out of the FTSE 100 on a better-than-expected UK Jobless Claims release. Impressive PMI survey data suggests that risks remain to the positive side for the report, but Jobless numbers are notoriously difficult to predict.

It otherwise remains important for British Pound traders to watch for market reaction to the US FOMC interest rate announcement due Wednesday. The US Fed is very widely expected to leave its short-term interest rate unchanged in its upcoming meeting, but that hardly rules out post-announcement volatility. Indeed, the same was sad for the past week’s Bank of England rate decision and we remain keenly aware that any surprise shifts in rhetoric could force substantial FX market moves. Recent US economic data has shown general improvements in domestic activity, but the same could have been said for the UK. With that in mind, we will keep a close eye on the FOMC announcement and its effects on broader financial markets.

The British Pound’s aggressive reversal leaves scope for further pullback, and the coming week of price action could be “make or break” for the previously high-flying GBPUSD.

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