Fundamental Forecast for British Pound: Bearish

- Mortgage approvals fell to 47.1 from 48.1,lowest in nine months
- Manufacturing PMI Rose to 57.2 from 56.5, Highest in 15 Years
- Final 4Q GDP figures revised higher to 0.4% from 0.3%

The British Pound saw its week-long rally come to an end which could set the sterling up for a retrace in the upcoming week if the pair continues to remain its current medium-term range. Cable has seen support on the back of an improving fundamental picture as the expansion in the manufacturing sector reached the highest level in over 15 years. Additionally, the final GDP figures for the fourth quarter of 2009 were revised higher to 0.4% as the economy saw stronger growth than initial expected. However, not all data was warm and fuzzy as mortgage approvals slipped to a nine month low of 47,100. Tight lending standards have been a concern for the BoE which has led them to keep the door open for future quantitative easing.

The central bank put out its quarterly credit conditions survey which reported that the availability of credit for households was broadly unchanged. Mortgage availability is expected to remain broadly stable over the next period which will mostly likely lead to the central bank pausing their asset purchase program unless conditions deteriorate. The survey also showed that lending terms for smaller firms tightened further despite a rise in demand for credit from small and medium sized firms. Yet, a surprising fall in default rates for medium and large nonfinancial companies was encouraging. Overall the report didn’t bring anything to light that would dramatically alter policy maker’s views.

The economic calendar presents major event risks with the BoE rate decision and PMI services on tap. The MPC has lagged its counterparts in the Fed and ECB in bringing an end to their liquidity providing efforts. Expectations are that the central bank will keep its benchmark lending rate at 0.50% and continue to pause its asset purchase program at £200 billion. It is difficult to gauge the potential market reaction to such a move as their last pause was non-eventful as it was forecasted but the month prior sparked an extended bearish rally as many expected an official end to QE. The improving outlook for the economy could start to see similar hopes this time around and disappointment could bring about the same reaction. Conversely, closing the curtain on the asset purchase program would be a vote of confidence in the economy and could lead to an extension of the recent rally. Service, construction and housing equity withdrawal data also bear watching as they will give insights into the strength of the recovery.

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