Fundamental Forecast for British Pound: Neutral

- Fitch expresses caution on UK sovereign rating, halts British Pound rally
- Similar caution from the Bank of England likewise hurts Pound
- Technical support nonetheless keeps the GBP afloat

The British Pound survived a week of fairly lackluster fundamental developments to trade marginally higher against the US Dollar, but a busy week of economic event risk may pose further challenges for the UK currency in the week ahead. Early-week news that Fitch Ratings took a “cautious” view on its outlook for the UK Government Bond’s AAA sovereign rating rattled markets and sent the Sterling instantly lower. The following Bank of England Quarterly Inflation report expressed a similarly cautious outlook for economic growth, and it seemed like the GBP was headed for a break of key support against the US dollar. Yet traders clearly had other things in mind, and the GBPUSD held key technical levels through the week’s close. Whether or not the pair can sustain its defense will likely depend on key event risk in the days ahead, setting the stage for another eventful week of British Pound price action.

Consumer Price Index numbers and mid-week Bank of England monetary policy minutes will likely be the major highlights in the week ahead, but traders should likewise keep an eye out for late-week UK Retail Sales results. Inflation and BoE outcomes will almost certainly cause volatility in UK interest rate expectations and—by extension—the British Pound. The currency rallied sharply through the Bank of England’s most recent interest rate announcement as officials boosted Quantitative Easing measures by less than expected. Traders will want to see the voting for that decision and general commentary on the future of monetary policy, while the previous day’s CPI data will likewise play a large part in determining monetary policy forecasts. Current consensus forecasts call for a modest rise in year-over-year inflation rates, and it is admittedly difficult to handicap likely reactions to the event. Lofty expectations for later-week Retail Sales numbers, on the other hand, leave large room for disappointment.

The British Pound has thus far been able to hold key technical and psychological support versus the Euro and US Dollar, but traders’ resolve will likely be put to the test in the week ahead. We have long called for GBP outperformance versus the Euro on clear sentiment extremes. According to US CFTC Commitment of Traders data, Non-Commercial traders remain fairly heavily long the EUR/USD and short the GBP/USD—giving us a fairly bearish EUR/GBP bias. Yet positioning has thus far eased considerably from previous extremes, and the British Pound is at clear risk for losses on continued disappointments in domestic fundamental developments. All else remaining equal, we expect the British Pound to break the psychologically significant 0.8900 mark against the Euro, but our forecasts will likely be put to the test in the week ahead.

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