Fundamental Forecast for British Pound: Bearish

- The dovish BOE Quarterly Inflation Report impacted interest rate forecasts
- The UK claimant count rate rose to a 14-year high in July
- View our Monthly British Pound Exchange Rate Forecast

The past week of price action for the British pound marked little more than a period of consolidation, though the currency did lose against every major except the Canadian dollar. From a technical perspective, GBPUSD remains above a rising trendline at 1.6450 connecting the July and August lows, and a break lower would open the door to 1.6200. Ultimately, macroeconomic factors are working against the British pound, as conditions have yet to show any signs of improvement despite the Bank of England’s aggressive rate cuts and quantitative easing (QE) program. That said, the BOE’s decision to expand their QE program to 175 billion pounds on August 6 may have done more harm than good, as the original 125 billion pounds had little to no impact on lending and money supply and throwing another 50 billion pounds at the problem may not do the trick either. Indeed, since the August 6 announcement, the British pound has fallen 2 percent against the Japanese yen and by 1.45 percent versus the US dollar.

Looking ahead to this coming week, there will be a flurry of UK economic reports but only two may have a substantial impact. First, the UK’s consumer price index (CPI) reading for the month of July is expected to fall for the first time in six months at a rate of -0.3 percent. This may lead the annual rate of growth, which is more closely watched by the BOE, is forecasted to fall to 1.5 percent, the lowest since November 2004, from 1.8 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year-end. On the other hand, if CPI holds strong, the currency could rally in response.

Then, on Wednesday, the minutes from the BOE’s last meeting will hit the wires. Since the central bank’s August 6 policy statement and August 12 Quarterly Inflation Report have already revealed their dovish bias and dour outlooks, the minutes may not shake up the British pound too much. Nevertheless, signs that the BOE may seek to add to the QE program later in year could hit the UK’s national currency hard.

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