Fundamental Forecast for British Pound: Bearish

- UK Mortgage Approvals Slip to Eight-Month Low, Consumer Credit Improves - Bank of England Maintains Policy in March
- Consumer Confidence Advances to Two-Year High

The British Pound slipped to a 10-month low against the U.S. dollar as the economic docket reinforced a weakened outlook for the UK, and fears of a protracted recovery could weigh on the exchange rate over the following week as policy makers continue to see ongoing slack in the private-sector. Meanwhile, there was little reaction to the Bank of England’s interest rate decision as the central bank held the benchmark interest rate at 0.50% and maintained the target for its asset purchase program at GBP 200B, but the minutes of the meeting due out on March 17th is likely to stoke increased volatility in the exchange rate as investors weigh the prospects for future policy.

Bank of England board member Andrew Sentance said that the economic recovery in Europe’s second largest economy is “still fragile” during an interview with the Hereford Times, and continued to see “a lot of uncertainties about economic prospects” as households face tightening credit conditions paired with the deterioration in the labor market. At the same time, Mr. Sentance noted that business sentiment “has improved greatly,” and expects the recovery to become “more firmly established” as the expansion in monetary and fiscal policy continues to feed through the real economy. As a result, the BoE is likely to hold a neutral policy stance going into the second-half of 2010, but dovish rhetoric from the MPC is likely to weigh on the exchange rate as investors scale back expectations for a rate hike later this year.

Nevertheless, a report by the Royal Institution of Chartered Surveyors is anticipated to show UK home prices increase at an annual pace of 30% in February after rising 32% in the previous month, while the visible trade deficit is expected to narrow to GBP 7.000B from GBP7.278B in December. In addition, industrial outputs are projected to increase 0.3% in January, with manufacturing forecasted to expand for the third-consecutive month, and the data could push the exchange rate higher as it encourage an improved outlook for future growth.

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