Fundamental Forecast for British Pound: Bearish

- U.K. Consumer Prices Weaken More-Than-Expected
- Chancellor of the Exchequer Alistair Darling Maintains Pledge to Cut Deficit
- Retail Spending Tops Forecasts

The British Pound maintained the broad range from earlier this month, with the GBP/USD finding near-term support ahead of the March low at 1.4782, and the exchange rate may continue to trend sideways over the following week as investors weigh the prospects for future policy. The Bank of England announced that it will introduce a two-tier auction scheme later this year, which will “provide liquidity insurance without distorting banks’ incentives for prudent liquidity management, and whilst minimizing the risk being taken onto the bank’s own balance sheet.” The statement from the central bank said that the new proposal will “permit the allocation of a greater proportion of funds against a broader range of collateral as evidence of stress increases,” and went onto say that the BoE “will stand ready to adjust the size of long-term repo operations in light of evidence of financial conditions.”

Meanwhile, Chancellor of the Exchequer Alistair Darling maintained his pledge to halve the deficit over the next four-years during the budget report earlier in the week, but expects the short-fall to hold around GBP 163B in 2010-11 from GBP 167B this year as the government aims to encourage a sustainable recover. At the same time, Mr. Darling expects the economy to expand 1.00%-1.50% this year, but lowered his 2011 GDP projection to 3.00%-3.50% from an initial forecast for a 3.25%-3.75% rise in the growth rate as he “took that gain and applied it to reducing borrowing further.” However, as the budget deficit continues to push higher, the marked expansion in fiscal policy is likely to put additional pressures on monetary policy, and the MPC is likely to hold a dovish stance going into the second-half of the year as the board expects to see price growth fall below the 2% target later this year. As a result, a Bloomberg News survey shows all of the 24 economists polled expect the BoE on hold borrowing costs steady at their next meeting on April 8th, but the central bank may continue to see scope to expand its asset purchases over the coming months as it aims to balance the risks for growth and inflation.

Nevertheless, the economic docket for the following week is expected to encourage an improved outlook for the region as market participants expect mortgage approvals to increase to an annualized pace of 48.4K in February from 48.2K in the previous month, while consumer credit is expected to increase 0.4B during the same after unexpectedly expanding 0.5B in January. Moreover, the final 4Q GDP report is expected to show the growth rate rising 0.3% from the previous three-month period, but a downward revision could weigh on the exchange rate as policy makers see a risk for a protracted recovery. Moreover, the GfK consumer confidence is anticipated to increase to a six-month high of -13 in March from 14, while the PMI for manufacturing is forecasted to rise to 56.8 from 56.3 in February, which would be the highest reading since comparable records began in 2001.

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