Fundamental Forecast for British Pound: Neutral

- Trade deficit narrowed more than expected to 3.329B against forecasts of 3.900B
- Consumer confidence fell in March by the most since July, 2008

The British Pound erased most of the gains that it built during the past week at the end as a surge in risk aversion saw sterling lose ground against the safe haven dollar and yen. An SEC fraud suit against Goldman Sachs derailed equity markets potentially signaling an end to the impressive rally that has seen stocks rise over 70% from the credit crisis lows. If risk aversion continues to generate greenback support we could see the GBP/USD look to test support levels as the pair has seen its correlation with risk strengthen with the BoE on hold. Prior to the blockbuster case, Cable had extended its two week rally on the back of an improving political picture and strong exports. The U.K. trade balance saw its budget deficit narrow to 3.329 billion as exports surged 9.5 percent.

Strong demand from abroad increases the odds of a sustainable recovery, but consumer confidence sliding to 72 from 81, the most since July, 2008 is evidence that domestic growth isn’t ready to take the torch. The BoE has maintained that there is a great deal of slack in the economy and with credit conditions remaining tight consumer and business spending is expected to remain subdued. The central bank has left their asset purchase program on hold and will refrain from commenting on monetary policy until after the May 6th elections which leaves this week’s release of the minutes from their last policy meeting as the last time markets can gather insight before the MPC’s next decision. The central bank has been unanimous regarding their decision to leave QE open but some members have started to see increasing upside risks to inflation. Therefore, any dissenting votes to maintaining the option of adding to the asset purchase program could raise expectations for its termination at the May 10th decision.
Inflation data will cross the wires before the meeting minutes with economists forecasting a rise to 3.1% to put consumer prices back above the threshold and justifying members concerns. The economic calendar overall is full of event risk with the employment report, retail sales, mortgage approvals, the budget deficit and first quarter GDP. An improving labor market and improving consumer consumption will raise the outlook for domestic growth. Signs of continued strength combined with a positive frist quarter growth reading could spark sterling support as it will begin to raise interest rate expectations. However, if broader risk aversion continues the positive fundamental data could be overlooked or at a minimum offset.

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