Fundamental Forecast for British Pound: Bearish

- British Pound holds ground as Bank of England maintains policy
- Look to key UK Consumer Price Index figures to determine BoE Policy
- View our monthly British Pound Exchange rate forecast for October

The British Pound was the only major currency to decline against the US Dollar to finish the week’s trade as traders showed seemingly little interest in holding GBP-long exposure. A generally bullish trend for UK economic data releases came to a screeching halt on a dismal Industrial Production report. Industrial output tumbled 2.5 percent in the month of August—far worse than the consensus forecast for a 0.2 percent gain. Said figures overshadowed bullish housing data and an effectively GBP-bullish Bank of England rate decision. The UK central bank left its target interest rate unchanged in line with consensus forecasts. More importantly, however, officials left the size of their quantitative easing program unchanged—leaving scope for a further wind-down of their unconventional QE efforts. The jury is still out on whether the Bank of England is done with its accommodative monetary policy measures, and the coming week’s critical inflation and Jobless Claims data will likely make for an exciting week of GBP trade.

Consensus analyst forecasts call for relatively unchanged Consumer Price Index and Jobless Claims numbers, but any surprise could instantly shift market views on future Bank of England policy. The BoE has a fairly clear mandate to keep annual inflation at or around 2 percent, and recent numbers suggest that year-over-year CPI changes will continue to fall below target. A continuation in said trend would keep pressure on the BoE to maintain record-low interest rates and quantitative easing measures. If numbers surprise to the topside, however, monetary policy hawks will once again call for an end to the BoE’s aggressively accommodative stance. Suffice it to say the British Pound is likely to react quite strongly to any surprises, and it will be important for traders to watch for unexpected results.

It otherwise remains critical to watch for changes out of UK Jobless Claims figures and broader shifts in market sentiment. The past week’s impressive performance throughout global equity markets should have left the risk-sensitive British Pound higher. Yet traders had other things in mind, and the British Pound fell against the safe-haven Japanese Yen. Such divergence hint at a shift in market dynamics, but one week hardly makes a trend. We suspect that the British Pound will regain its correlation to the US S&P 500 and other key risk sentiment barometers. As such, it remains critical to watch whether the S&P can continue its recently impressive gains.

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