The British pound ended the week relatively unchanged despite significant volatility as constantly shifting risk winds and mixed signals from improving fundamental data and a dovish BoE kept traders guessing. The Dubai government asking for a “standstill” with its creditors raised concerns over the stability of the financial system ignited a flight to safety which sent the GBP/USD to its lowest level since November 3rd as it broke from its recent range of 1.6500-1.6800. Sterling regained its footing as improving fundamentals and the prospect of growth returning in the fourth quarter continues to lend support. Indeed, 3Q U.K. GDP was revised higher to 0.3% from the initial reading of 0.4% as private consumption was revised to flat from -0.6%, ending five straight quarters of negative consumer demand. The CBI quarterly distributive trends report improving to 13 from 9 confirmed the improvement in consumption and the forecast of a rise to 19 for the next period increases the chances that consumers will contribute to growth. This could ease policy makers concerns that restrictive lending standards may continue to weigh ion domestic growth and negate the need for further quantitative easing.

Governor King in a statement to the treasury committee stated that “powerful forces are continuing to restrain spending in the economy. Banks are actively trying to reduce their leverage. There is a long way to go in that process, and whilst it is continuing, the availability of credit to households and companies will be impaired. That, combined with the uncertainty about future incomes and profits, will make households and companies reluctant to spend.” Despite the central banks concerns previous sterling support was a sign that market participants are expecting that the MPC will leave the total of their asset purchase program at 200 billion pounds.

The level of consumer credit and the number of mortgage approvals are expected to have improved in October which would further the case that the policy makers will refrain from additional QE. Economists are also expecting that the manufacturing and service sectors continue to expand with both PMI readings forecasted to remain above 50. Therefore, we could see a return of sterling support on the improved outlook for growth and interest rates. Yet, if concerns grow that the issues in the middle east are symptomatic of a broader problem then we could see more safe haven flows into the dollar and away from the pound.

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