Fundamental Forecast for British Pound: Bearish

- U.K. Consumer Prices Exceed Upper Bound of 3%
- Bank of England Votes Unanimously, Labor Market Weakens
- Mortgage Approvals Unexpectedly Weaken in January
- Household Spending Disappoints

The British Pound tumbled lower against the greenback, with the exchange rate slipping to a fresh yearly low 1.5347, and the currency may continue to retrace the advance from the previous year as policy makers see a risk for a protracted recovery. The Bank of England minutes showed the MPC voted unanimously to hold the benchmark interest rate at 0.50% and to suspend its asset purchase program earlier this month, but the board maintained the option to “provide further monetary stimulus” as they sees the economy facing “considerable” headwinds over the coming months.

In addition, the BoE held a neutral outlook for future policy and said there wasn’t “an immediate need for further relaxation,”, and noted that the recent rise in inflation was merely a “temporary deviation” as underlying price pressures remain to the “downside.” At the same time, BoE Governor Mervyn King continued to see a “substantial margin” of slack in his letter to Chancellor of the Exchequer Alistair Darling, but went onto say that he would be willing to tighten policy if price pressures continue to intensify over the medium-term. As a result, the ongoing weakness in the private sector paired with the deterioration in the labor market is likely to weigh on the prospects for future growth, which could certainly dampen price pressures over the coming months, and the central bank may adopt a wait-and-see approach throughout the first-half of the year as they assess the impact of the emergency measures.

Nevertheless, the economic docket for the following week is expected to encourage an improved outlook for the U.K. as market participants project the preliminary 4Q GDP reading to show a 0.2% expansion in economic activity, while business investments are expected to increase 0.1% during the same period after contracting 0.6% during the three-months through September. However, consumer confidence is anticipated to have stalled in February following the rebound in the previous month, and households may lower their outlook for the economy as they continue to face tightening credit conditions paired with the deterioration in the labor market.

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