Fundamental Forecast for British Pound: Bullish

- Trade Deficit shrinks as exports reach highest level in a year on weak pound.
- UK manufacturing was unexpectedly flat in November, despite broader gain in industrial production
- NIESR GDP Estimate for December rose to 0.3% from 0.2% the month prior

The British pound ended the week on a down note following five consecutive days of gains which were fueled by improving fundamentals and hawkish rhetoric from the BoE. Sterling saw a surge in bullish sentiment following MPC member Andrew Sentence’s comments that the central bank has taken sufficient measures to stimulate the economy and that an end should be brought to the current asset purchase program which currently stands at 200 billion pounds. He would go onto say that the committee may need to raise rates before the end of the year in order to prevent ballooning inflation. Prior pound weakness helped spur demand for British goods as exports rose to the highest level in a year in November, shrinking the trade deficit to 6.8 from 7 billion pounds. November also saw industrial production rise by 0.4% despite manufacturing holding flat for a consecutive month.

A week of major event risk should continue to generate pound volatility highlighted by the release of the BoE minutes from its January policy meeting. It is widely expected that the MPC will bring an end to their asset purchase program in February and if the comments from the entire committee reflect those of Andrew Sentence, then we could see bullish sterling sentiment return. Conversely, a split vote with members still calling for additional quantitative easing would sink interest rate expectations and put the sterling at risk. December’s consumer price report will be the first release with market moving potential as economists are forecasting a rise in inflation to 2.5% which would put it above the government’s 2.0% target. Broader prices have started to appreciate on rising energy costs, but the forecast for core prices to reach above the target level as well at 2.3%, will be concerning for policy makers. Inflation at these levels will assuredly raise expectations for a rate hike and could generate sterling support. However, pound bulls may lack conviction with the central bank minutes and employment data to follow the next day. Additionally, Governor King is on record saying that the committee expects inflation to be volatile and to peak above their threshold before succumbing to existing slack.

Expectations for a consecutive month of declining jobless claims and a rebound in retail sales will bolster the case for further price growth. An improving labor market and growing domestic demand will add to signs t hath e recovery has taken hold and could lead market participants to overlook any dovish rhetoric from the MPC. The GBP/USD breaking from its downward trending channel provides technical justification for further upside. However, the 50-Day SMA at 1.6350 converging with the 50.0% Fibo of 1.6877-1.5832 stalled the recent rally and provides a formidable level of resistance.

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