Fundamental Forecast for British Pound: Neutral

- U.K. manufacturing rose to the highest level since 1994 in April
- Producer prices accelerated by 1.4% in April pushing the annualized rate to 5.7%
- Mortgage Approvals Improved to 48.9K from 46.9K

The British Pound may remain under pressure if the BoE continues to sit on the sidelines following a political election that produced a hung parliament. Concerns are that the lack of a majority from any political party will prevent measures from getting passed in order to help cut the budget deficit. Therefore, we could see markets look to the central bank to take a leadership position regarding future monetary and fiscal policy. However, the MPC will most likely leave their benchmark rate unchanged at 0.50% and continue to keep their asset purchase program on hold with a new formed government and the prevailing issues in Europe. The potential for the sovereign credit troubles in the Euro-Zone spreading to the U.K. makes a case for additional quantitative easing from the central bank. However, factory gate prices jumping 1.4% in April weakens policy maker’s case that inflation will return to target levels.

Consumer prices are already above the central bank’s 3.4% threshold and may continue to accelerate if producers continue to try and pass through rising costs. Slight improvements in manufacturing -the highest level since 1994, construction and mortgage approvals showed that the U.K. recovery is sustaining. However, the mild improvements and an unexpected decline in the service sector PMI reading to 55.3 from 56.5 could be a sign that growth has started to slow. A non-eventful BoE rate decision would shift focus to the MPC’s quarterly inflation report, as it may provide the first statements from Governor King since the date for elections was set, as the central bank doesn’t customarily release a statement if no action is taken at their policy meeting.

Sterling was sunk during the past week as the troubles in Greece combined with the concerns over the hung parliament saw it lose nearly 800 pips against the dollar. The GBP/USD has retraced over 300 pips from its low of 1.4474 putting the pair back within its prior broader range of 1.4800-1.5500. If the pattern holds true then more upside potential could be realized with 1.5000 and the 50-Day SMA at 1.5179 as possible resistance levels. The upcoming economic calendar will be full of event risk for the Pound as industrial production, employment and trade balance releases are scheduled in addition to the rate decision and quarterly inflation report. Strong employment and production figures could raise the outlook for inflation ahead of the BoE’s report and generate sterling support.

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