Fundamental Forecast for British Pound: Bearish

- BOE Holds Dovish Outlook, Maintains Option for Further Easing
- UK Retail Sales Growth Worst in 15 Years in January, Says BRC
- RICS Survey Hints UK House Prices May Decline as Supply Swells
- British Pound Finds Channel Support, May Bounce Against US Dollar

The British Pound is set to fall in with broad trends in risk sentiment as the economic calendar fades from view after the Bank of England firmly confirmed a dovish medium-term posture in its quarterly inflation report.

The Pound lagged behind most of its major counterparts in reflecting the shift in risk appetite that began to unfold four weeks ago as speculation about the end of quantitative easing at February’s Bank of England policy meeting took center stage. That meeting has now come and gone, with the BOE coming out of the announcement looking every bit as dovish as before despite its decision to leave asset purchases at £200 billion for the time being. Indeed, the quarterly inflation report that served as the basis for the decision said that “the pace of recovery is somewhat less strong than [previously expected, while] inflation is likely to fall back to below the target” over the medium term despite a likely uptick above 3% in the first quarter as higher oil prices and sterling depreciation feed through. As for QE, central bank chief Mervyn King explicitly said that although the BOE had paused asset purchases, “it is far too soon to conclude that no more purchases will be needed.”

Against this backdrop, the coming week’s economic calendar looks rather uneventful. Indeed, although consumer prices are expected to grow at a brisk annual pace of 3.5% while jobless claims decline for the third consecutive month in January, the outcome are unlikely to prove market-moving considering their apparently limited implications for monetary policy. Rather, sterling is like to fall in with the remainder of the majors, clinging to the path of risk appetite as the dominant force driving directional momentum. Appropriately enough, the near-term correlation between the Pound’s average trade-weighted value and the World Stock Index now stands at 0.68 versus -0.31 just a week ago. Global equities’ correlation with GBPUSD in particular is even more impressive, registering at 0.91.

On balance, this is likely to allow for some near-term gains in the UK unit as signs of exhaustion amid the bears open the door for a brief correction higher in the spectrum of riskier investments. The so-called resolution of the Greek budget issue is likely to be tipped as the catalyst for the move. Indeed, although the EU did not offer anything concrete by way of a plan to bail out Greece or any other debt-ridden southern European economy, the very fact that policymakers were comfortable enough to just pay lip service to the situation may be enough to offer a bit of calm to jittery investors. That said, the Greek issue was only the recent face of a broader selloff that was rooted in concerns about the durability of the global economic recovery that was taken for granted in 2009. This larger issue is by no means resolved, suggesting the ultimate path of least resistance – both for the sterling and for risky assets in general – lead invariably lower.

DailyFX provides forex news on the economic reports and political events that influence the forex market.