Fundamental Forecast for British Pound: Neutral

- Warning on UK Sovereign Rating sends British Pound tumbling
- British Pound fails to react to Bank of England announcement
- View our monthly British Pound/US Dollar Exchange Rate Forecast

An uneventful week of British economic event risk left the domestic currency modestly lower against the resurgent US Dollar through Friday’s close. A hotly-anticipated Bank of England interest rate announcement failed to elicit major reactions from FX markets. Instead, the week’s major British Pound volatility came on news that Moody’s Investor Services expressed doubts on the future of the UK’s sovereign debt rating. Such unexpectedly sharp volatility on unpredictable news underlines FX market unease, and it remains clear that currencies can post substantial moves at a moment’s notice. The week ahead promises considerable economic event risk out of both the UK and US economies, and we expect similarly large moves in the GBPUSD through the week ahead.

Recent doubts on outlook for UK debt ratings are likely to continue through the medium to long term, as large budget deficits and a fast-growing national debt have forced rating agencies to question whether major world governments’ debt truly deserves “risk-free” status. Any further suggestions that the UK’s AAA rating is at risk could easily force substantive pullbacks in the domestic currency. But foreseeable event risk can likewise cause major moves—starting with highly-anticipated UK Consumer Price Index data due Tuesday morning.

Analyst forecasts call for a robust 1.8 percent year-over-year Consumer Price Index inflation rate through November—a 0.3 percentage point jump from the 1.5 percent seen in October. Such an outcome would leave the headline inflation rate at a mere 0.2 percentage points below the Bank of England’s 2.0 percent inflation rate, and the noteworthy month-to-month change may become a cause of concern for the inflation-targeting central bank. Said result would likely raise pressure on the Bank of England to state its “exit plans” for removing its historic monetary policy stimulus and raise interest rates to combat inflation. Officials have already committed to ending the bank’s Asset Purchase Programme in two months, but they have otherwise provided few clues as to plans for ending their historic monetary policy stimulus. Suffice it to say, markets will remain on alert for surprising results from upcoming CPI inflation numbers and their implications for the future of interest rates and Quantitative Easing.

Not to be outdone, the following day’s UK Jobless Claims data will likely provide considerable short-term volatility for the British currency. Markets predict that jobless claims rose by a relatively modest 12,500 through November—the smallest job loss since April, 2008. Given similarly bullish jobs data out of the US economy, markets are riding high on prospects for broader global economic recovery. Such optimistic expectations leave considerable margin for disappointment, and it will be important to watch whether UK Jobless Claims data can match lofty expectations.

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