Fundamental Forecast for British Pound: Neutral

- Chancellor of the Exchequer Osborne Pledges to Cut Deficit
- BOE Voted 7-1 for 0.5 Percent Interest Rates, 8-0 to Keep Bond Holdings at 200 Billion Pounds

The British pound has rallied against the U.S. dollar this week, finishing as the third-best performing G10 currencies through Friday’s close. For this upcoming week, traders are sure to keep a close eye on further technical developments as the markets digest the recent fundamentals in Great Britain.

During this past week, we have seen the new Chancellor of the Exchequer, George Osborne release his budget statement which is aimed to restore the fiscal surplus by 2015. Highlights from the emergency budget include the value added tax rising to 20 percent from 17.5 percent at the start of next year. Although this measure aims to to the nations deficit, the plan will likely weigh on consumer spending going forward. In addition, the budget statment showed that there will be a removal of tax credits with incomes over 40, 000 pounds. With regards to the capital gains tax on nonbusiness assets, Osborne said “low and middle income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers. They will continue to pay on their gains at 18 percent. From midnight, taxpayers on higher rates will pay 28 percent on their capital gains.” Away from the budget statement, GBP traders were faced with the Bank f England minutes this past week. Surprisingly, the decision to keep rates unchanged was 7-1 as policy maker Andrew Sentence said it is appropriate to “gradually” withdraw” BOE stimulus measures. This was the first time in seven months that the decision was not unanimous. However, it is noteworthy that policymakers said that uncertainty about risks have elevated in May, and recognized that it will take a while for inflation to return to its 2 percent target.

Though there was a desperate need for the recent emergency budget, the extreme measures however places the U.K. at risk for a double-dip recession for the second half of the year. One reason being, the increase in capital gains is likely to make residential properties less attractive. At the same time, consumers will be prone to scale back spending amid the jump in the value added tax. As for this upcoming week, the economic docket is expected to show an increase in house prices and consumer credit. If released as expected, house prices would have rose for the 14th time in the last 15th months, driven mostly by factors such as a shortage of properties. However, it is noteworthy that the recent advance in capital gains (illustrated earlier) may have cause an increase in home sales before this previous week’s budget announcement. Also on tap is the first quarter final reading for the gross domestic product which is expected to remain unchanged at 0.3 percent. Nonetheless, PMI manufacturing is expected to slightly push lower in June, while PMI construction is forecasted to remain.

With regards to price action this upcoming week, there is a lot to grasp before entering in a trade; however, the opportunity for a entry position amid a breakout in the GBPUSD may be on the horizon. In my analyst pick, I noted that the pair stalled at the 61.8 percent Fibonacci retracement on the downswing from April 26th to May 20th. However, towards the end of the day on Friday, the pair broke above this level. Also worth noting is the recent breakout above the falling trend line (1/20, 1/28, 4/26, 6/23). On a shorter term basis, we are seeing the pair trading in a rising channel on the daily chart. To confirm bullish British pound price action going forward, we will need to see a break above the 100 day SMA which has held since the beginning of this year.

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