Fundamental Forecast for British Pound: Bullish

- House Prices, Retail Sales Disappoint in February
- UK Trade Balance Deficit Unexpectedly Widens
- Industrial Output, Manufacturing Underperform

The British Pound may rise if the Bank of England is able to successfully convince the markets that it is truly shifted gears from an outright dovish posture to a wait-and-see approach with the release of minutes from the March meeting of the MPC.

Mervyn King and company were seemingly intent on projecting a neutral bias with this announcement, predictably leaving both elements (interest rates, quantitative easing) of its policy on hold and conspicuously opting out of issuing an accompanying statement to update the markets on their thinking. Bank officials took to the wires last week to reinforce this image. BOE chief economist Spencer Dale said that much of the impact of QE has yet to come through – thereby reinforcing the bank’s decision to halt asset purchases – but made it a point to note that it stands ready to expand the program if needed. Earlier in the week, MPC member Adam Posen struck a similarly balanced posture, saying he hopes the bank has “done it” with the existing amount of QE but adding that policy makers may do more “if something negative happens to the economy again.”

The British Pound may benefit if the BOE succeeds in branding themselves as standing truly at the center of the policy spectrum. The bank came out looking dovish in February despite having paused QE at 200 billion pounds, with the quarterly inflation report that served as the basis for the outcome proclaiming that “the pace of recovery is somewhat less strong than [previously expected]” and arguing that “it is far too soon to conclude that no more [asset] purchases will be needed.” Mr Posen deftly deflected last week’s saber-rattling from Fitch – who said the UK’s AAA credit rating may be threatened if it doesn’t do more about its fiscal shortfall – reminding that “all three major [political] parties have made it clear that they are going to pass some kind of austerity budget” ahead of general elections due to be called no later than June. A similar re-statement of confidence in the fiscal landscape and a unanimous vote to do nothing for the time being may help convince the markets that the BOE – rightly or wrongly – is indeed genuinely neutral on where to go from here. With the British Pound now appreciably undervalued on a purchasing parity basis against a good deal of its major counterparts (most notably the Euro), shedding the central bank’s dovish image may be just the thing to send the UK unit higher in the near term.

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