Fundamental Forecast for British Pound: Neutral

- Former MPC members grow increasingly bombastic on their forecasts for the central bank
- Consumer confidence rises to a 21-month high and purchasing plans 23-month high, but both are still net negative
- GBPUSD one of the few majors that is struggling with a range rather than potential trend reversal

Though they are inextricably linked, economic health and interest rate policy post two very unique concerns for sterling traders. The extension of the nation’s record-breaking recession a few weeks ago has devalued the currency’s standing amongst peers that have already emerged from the gloom. In turn, this throws interest rate timing and monetary policy in general into question. The Bank of England (BoE) will convene this coming Thursday and the outcome - whether it result in looser, tighter or no change to policy - will almost certainly alter trends and stoke volatility. What traders need to ask themselves is whether any drives will last long enough to break prominent ranges (GBPUSD) and perhaps reestablish the pound’s standing in the constant ebb and flow of risk trends.

Over the past month, we have seen a number of dramatic swings in the pound; and nearly every one of them has been tied to interest rate speculation. On Friday October 23, GBPUSD plummeted after the Office of National Statistics (ONS) reported the UK unexpectedly contracted for a sixth consecutive quarter – extending the worst recession on records going back to 1955. This specific release has been central to speculation heading into the November 5 meeting and it will no doubt weigh on central bank members’ decision. There will be no change to the benchmark lending rate; but there is high debated disagreement on what will happen with the group’s quantitative easing program. A few weeks ago, a central bank economist stated his belief that the group will likely pause its purchases. In fact, former MPC member Goodhart projected the same thing despite the dismal outcome of the economic update. However, market participants are highly skeptical. Economists are calling for a 50 billion pound extension to 225 billion (though there is debate about the size and whether they will in fact increase the limit). Regardless, the current target for gilt purchases was already reached through this past Thursday; so the central bank will have to make a decision to pause or increase the target.

Initially, the BoE was expected to make a decision on whether to extend or cap its unusual policy efforts at its last meeting; but they instead deferred to the forthcoming summit in order to review the updated economic activity and inflation forecasts. This assessment will have a fundamental importance all of its own (though its initial influence will be through establishing an argument for quantitative easing limits). After the surprise expansion of the economy’s painful recession through September, there is now less of a worry over whether the pound can remain competitive in the slow, global return of interest rates and more of a concern that the UK won’t be able to make a significant push into positive growth before the world-wide recovery levels off. Forecasts for general growth and its major components will be of primary concern; but inflation projections should be noted. Aside from the central banks outlook, there are a number of economic releases on deck to watch for potential volatility explosions. Indicators for housing, consumer confidence, manufacturing, services and construction health will provide a well-round and timely update on activity.

And, though pound traders have a lot of notable event risk to keep track of next week; it should not be forgotten that the underlying current is still investor sentiment. Should the BoE’s asset purchase target be altered, the impact on the pound will be filtered through the progression of risk appetite. Stationed at the extreme of the risk spectrum, this currency is considered a risk-philic as its financial markets and economy stand to benefit the most through the global advance of growth and investment.

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