Fundamental Forecast for British Pound: Neutral

- Bank of England decision dominates British Pound event risk in week ahead
- UK Hometrack data points to improved real estate market
- British Pound forecast bullish against the Japanese Yen
- British Pound volatility likely to continue

The British Pound finished the week modestly higher against the US Dollar on a sharp reversal in late-week trade. Relatively illiquid market conditions were likely to blame for the speed at which the GBP rallied; the lack of any real impetus for the sudden jump is the hallmark of thin-market price moves. The coming week should likely prove far more eventful as far as economic data is concerned, and the pronounced GBP downtrend will likely be put to the test on key pieces of economic event risk.

Early-week PMI Manufacturing, Construction, and Services survey data may set the tone for the highly market-moving Bank of England rate announcement and Producer Price Index release. Market analysts predict that all three PMI surveys will show modest improvements in their respective sectors; key Manufacturing and Services results are both expected to print above the expansion/contraction 50 mark. Construction data is understandably predicted to show continued contraction in the highly cyclical industry, but an expected monthly improvement suggests that the recession-battered industry will see a gradual improvement through the year. Material disappointments in any of these indices or Wednesday’s Nationwide Consumer Confidence data would likely put the very recent GBPUSD bounce in danger ahead of the Bank of England announcement.

Markets widely predict that the Bank of England will leave rates unchanged at modern lows through their upcoming meeting, but the accompanying statement has quite often produced substantial moves in the domestic currency. Traders will pay close attention to any and all references to the Asset Purchase program and broader outlook for withdrawal of monetary stimulus. Officials last stated that they would review their quantitative easing measures next in February. Yet that hardly rules out any earlier comments on the matter. Regardless of the outcome, we are likely to see sharp British Pound moves following the announcement.

The downtrodden British currency seems to be at a crossroads. The past two months of fairly consistent declines leaves short-term momentum firmly to the downside, but the very recent bounce suggests that traders are yet unwilling to push it materially below its 200-day Simple Moving Average near 1.6000. Forex Futures positioning shows that traders remain fairly net-short the British Pound against the US Dollar. Whether or not markets continue to sell the GBPUSD may very well depend on the coming week of key UK and US economic event risk.

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