Fundamental Forecast for British Pound: Bearish

- UK GDP was revised to -0.6% in Q2 from -0.7%, annual rate at record low of -5.5%
- Mortgage approvals in the UK eased down to 52,300 in August, indicating lingering pressures in the housing market
- However, Nationwide Building Society said UK house prices rose for the fifth straight month in September

The British pound was one of the strongest major currencies last week, losing only against the Canadian dollar and ending essentially unchanged versus the US dollar. That said, the moves may have been more of a relief rally than anything else, as the British pound has depreciated 2 percent against the greenback, 4.3 percent against the euro, and almost 5 percent against the Japanese yen over the past month. Indeed, a handful of fundamental reports from the nation have been slightly better than expected, such as the 0.9 percent rise in Nationwide house prices, but more often than not, they are countered by contradicting data, such as the drop in the purchasing managers’ index (PMI) for the construction sector to 46.7 in September from 47.7.

One area that has seen significant improvement recently is the services sector. PMI for the UK’s services sector has consistently held above 50 since May, indicating an expansion in activity, and data due to be released on Monday is likely to show a continuation of the trend in September as PMI is projected to rise to a two-year high of 54.5 from 54.1. However, with the unemployment rate in the UK also steadily rising, there are some downside risks for the sector, and consumption as a whole.

The main event risk for the British pound will not come up until Thursday, though, when the Bank of England (BOE) will announce their latest rate decision. The BOE is anticipated to leave their Cash Rate target unchanged at 0.50 percent, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement. This has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated a neutral stance as they simply stated they would continue their £175 billion quantitative easing program, and this ultimately led the British pound to rally against the US dollar and euro immediately. A repeat of this statement is likely to trigger a similar reaction from the British pound, but on the other hand, any indication that the program may need to be expanded down the line would weigh very heavily on the currency. That said, such a scenario is highly unlikely.

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