Fundamental Forecast for British Pound: Bearish

- Speculative Sentiment Points to Mixed British Pound Outlook
- UK Mortgage Approvals Rise for Second Month in April
- Positioning Hints Pound to Resume Downtrend vs US Dolllar

The British Pound may look past an interest rate announcement from the Bank of England to fall in line with the trends in risk sentiment, setting up the currency for losses amid an aggressive return to risk aversion.

While the BOE surely headlines the economic calendar, the outcome of the rate decision may not reveal much that has not already found its way into the exchange rate. Indeed, the near-term policy landscape was broadly established in the latest Quarterly Inflation Report, with the bank again chalking up the recent upswing in inflation to temporary factors – specifically, the depreciation of sterling and higher oil prices – and arguing that current policy will be sufficient to bring prices back toward the 2 percent target level over the medium term.

The bank has also stressed the need to rein in public finances, but little on that front will be concrete until the new administration unveils an emergency budget later this month. While austerity is sure to be the name of the game, the BOE is unlikely to commit to any significant changes in monetary policy until the precise mixture of spending cuts and tax increases – as well as their timing – is available to guide their thinking. On balance, the growth rate of government spending has regularly outpaced that of private consumption since the first quarter of 2008, so any significant retrenchment on the fiscal side is likely to bring a slowdown in growth and keep Mervyn King and company (as best) at the current, loose policy setting.

Looking past the rate decision, a return to risk aversion may prove to be the dominant force driving sterling price action. Currency markets went into last week on a mission to size up the ability of the United States to support the global economic recovery, with May’s NFP report serving as the benchmark gauge. Indeed, with EU growth buried under a growing pile of debt and China proactively slowing its buoyant economy amid fears of asset bubbles and runaway inflation, the US was left as the last major engine of growth where some hope could be had. As it stands, the jobs report proved disappointing and risk appetite evaporated, opening the door for the safety-linked US Dollar and Japanese Yen to continue a sustained advance against the spectrum of major currencies, including the UK unit.

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