Fundamental Forecast for British Pound: Neutral

- An few optimistic comments from the BoE’s Fisher triggers the sharpest pound rally in months
- UK jobless claims rise by the smallest amount since May of 2008
- Has the GBPUSD rally too far, too fast? What is the technical picture of this major pair?

There was a none-too-subtle shift in sentiment for the British pound last week. With just a few comments from a member of the Bank of England, we have seen the pound shoot higher against all of its major counterparts. Just to give some perspective as to the strength of this rally, the sterling set its biggest one day advance against its primary counterpart (the euro) in eight months. An objective assessment of BoE Markets Director Paul Fisher’s remarks were relatively ambiguous and has neither been confirmed by any other officials nor has there been any action to support his claim that the BoE would in fact pause its bond purchasing program to preserve options in the face of a tentative recovery from recession. However, we will soon see whether these remarks hold water with both the BoE minutes and the advanced reading of 3Q GDP due over the coming week. We may be looking at one of the most fundamentally influential periods for the pound in months.

It’s been a long time since we could say that upcoming event risk could produce a meaningful change in the underlying trend of the British pound (short of extending the currencies painful tumble). However, the economic docket ahead certainly has that potential. There is a range of notable economic indicators on deck; but only two can truly redefine the currency’s future. The first release to take note of (and the most likely to reverse or maintain this past week’s momentum) is the minutes of the central bank’s last rate decision due on Wednesday. If there is any merit to Fisher’s forecast for the MPC to put a pause on their quantitative easing program, it could very well come from this report. On the other hand, if his outlook perhaps was for something further down the line; then no mention of a change from the status quo could send a bearish ripple through the sterling crosses. It is very likely that policy officials wanted to hold off on making any decisions until after the release of the initial third quarter growth numbers. This would be a reasonable move and it could give some official support for such a change in policy; but the reversal that we saw last week was borne out of sheer sentiment. To sustain such a move, we need a real fundamental backing. The other scenario would be confirmation that the purchasing program has indeed been put on hiatus which would be the first genuine change in the bank’s policy tone since the financial crisis picked up steam. Such an event could truly alter the currency’s standing in the FX market.

The other major event for the week is Friday’s third quarter gross domestic product release. It is unfortunate, from a traders’ perspective, that this report comes out just before the weekend; because if it was released on a Monday there would be far more liquidity and time for the reaction to play out. However, as it is, there are mere hours to trade on the data before the weekend drains liquidity and rational minds can take over. This is not to mean this is going to be a non-event. Far from it. The bleak economic outlook for Europe’s second largest economy has been the source of the sterling’s weakness over the past 12 to 18 months. When the outlook for the global economy was pointing to a recession, the UK was projected to see the worst of it. In the subsequent reversal, the United Kingdom was seen struggling to pull itself up. Should the 3Q reading report growth in the period through September, it would be a major step towards seeing a more meaningful recovery. A positive reading will be considered bullish; and the bigger the upside surprise, the more aggressive the pound’s run will be. Read through the details of the report though.

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