Fundamental Forecast for British Pound: Bullish

- Bank of England’s rate decision yields no surprises: rates and QE program unchanged
- UK Nationwide consumer confidence fell by most in over a year
- UK mortgage approvals, manufacturing PMI suggest economy still recovering

The British pound was a laggard across the majors over the course of the past week amidst mixed signs of recovery in the UK. Though mortgage approvals and manufacturing PMI rose, consumer confidence slumped. Meanwhile, the Bank of England made no monetary policy changes, as expected, and left the Bank Rate at 0.50 percent and maintained their asset purchase target of 200 billion pounds. That said, a statement that the program would take another month to complete adds to evidence that a key decision will be made in February, when the BOE will also release their Quarterly Inflation Report.

The final piece of UK news came on Friday, as the UK producer price index (PPI), showed that input costs are on the rise, and producers are raising output prices to accommodate for that. The input PPI rose by 0.1 percent during the month of December, while the annual rate shot up to a 13-month high of 6.9 percent from 4.0 percent. Likewise, output PPI jumped 0.5 percent during the month, leading the annual rate up to an 11-month high of 3.5 percent from 2.9 percent. Nevertheless, input costs are still outpacing output price increases, suggesting that profit margins remain under pressure.

Looking ahead to the coming week, the economic indicators due to be released are not likely to be groundbreaking for the British pound and may not provide enough impetus to push the GBPUSD back above its 200 SMA, barring another steep drop in the greenback. On Monday, the RICS house price balance is projected to rise to a three-year high of 36.5 percent for the month of December, adding to signs of stabilization in the UK housing market. Furthermore, the visible trade balance is anticipated to show that the deficit narrowed to 7.0 billion pounds in November from 7.108 billion pounds, suggesting that exports continued to rise into Q4. Likewise, Wednesday’s release of industrial and manufacturing production may reflect rising demand for UK goods, as industrial output is anticipated to rise by 0.3 percent while manufacturing output could rise by 0.2 percent.

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