Fundamental Forecast for British Pound: Bearish

- UK CPI rose more than expected in October to 1.5% from 1.1%
- The BOE’s meeting minutes showed that the MPC voted 7-1-1 to expand the APF by £25B
- The OECD suggested the BOE keep rates at a record low until 2011

The British pound lost 1 percent against the US dollar and nearly 2 percent versus the Japanese yen over the course of the past week as the minutes from the Bank of England’s November meeting led the markets to price in fewer rate increases over the next 12 months. The vote count showed that seven Monetary Policy Committee members voted to expand the Asset Purchase Facility (APF) by £25 billion to £200 billion, but one voted for no change while another voted to increase the APF by £40 billion. This suggests that the BOE may be open to expanding the APF later on, and evidence of this will only be amplified by disappointing news.

Looking to this week’s event risk, Tuesday’s data is expected to show that total business investment fell for the fifth straight period in the third quarter, this time at a rate of 3.9 percent. Declines generally don’t bode very well for broader growth, as companies that aren’t investing aren’t likely to be experiencing improved activity or hiring workers. On the other hand, the BBA’s measure of loans approved for house purchases is projected to rise for the seventh straight month in October to 44,000 from 42,088, signaling percolating demand and potentially, increasing prices.

On Wednesday, the second reading of UK GDP for the third quarter is anticipated to be revised slightly higher to a quarterly rate of -0.3 percent from -0.4 percent, and an annual rate of -5.1 percent from -5.2 percent. This will continue to reflect the sixth straight quarter of contraction, and the only way the British pound is likely to respond in a positive way is if GDP surprisingly rises on a quarterly basis. That said, traders also need to keep in mind that US markets will be closed on Thursday for the Thanksgiving holiday and will close early on Friday, and as a result, volumes will be lower than usual, which may contribute to either flat price movements or extremely choppy trade. The latter may dominate, though, as US-based event risk will be very high. From a technical perspective, FXCM SSI – a contrarian indicator – positioning recently flipped to net long, suggesting GBPUSD could be in for further declines. Additionally, the pair’s break below a rising trendline drawn from the October 13 lows and bearish weekly candle formation leads us to maintain a bearish outlook on GBPUSD.

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