Fundamental Forecast for British Pound: Bullish

- Chancellor of the Exchequer Osborne Plans To Cut Public Handouts
- U.K. Mortgage Approvals Rise Less-Than-Expected
- Consumer Confidence Slips to Six-Month Low

The British Pound extended the rebound from the May lows, with Moody’s Investor Services talking down fears for a rating cut, and the exchange rate may continue to push higher over the following week as the economic docket is expected to reinforce an improved outlook for future growth. Moody’s said “the U.K.’s debt affordability would remain consistent with an AAA rating” as Prime Minister David Cameron shifts gears and aims to tackle the budget deficit, but went onto say that the austerity measures could drag on the recovery as the real economy remains weak. At the same time, the Bank of England is widely expected to hold the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B as the new coalition in Britain plans to tighten fiscal policy and cut the budget deficit, but a split within in the MPC is likely to spark increased volatility in the exchange rate as investors weigh the prospects for future policy

A Bloomberg News survey shows all of the 35 economists polled forecast the BoE to maintain its current policy this month, while investors are pricing a 3% chance for a 25bp rate hike, but the MPC may refrain from releasing a policy statement, which could produce mute price action as the central bank is scheduled to release the meeting minutes on July 21. Nevertheless, the BoE maintained a cautious outlook for the region for the region as demands for mortgages unexpectedly declined in the second-quarter, and went onto say that credit availability is likely to weaken over the next three-months as the banking sector remains under pressure. As a result, central bank board member David Miles argued the MPC should maintain a loose stance for the time being and gradually tighten monetary policy as he expects to see “reasonable growth” going forward. However, mounting price pressures could lead Andrew Sentance to dissent against the majority for a second-month as inflation holds above the upper limit of 3%, and the division in the MPC could spark speculation for a rate hike next year as the central bank maintains its dual mandate to ensure price stability while promoting full-employment.

Nevertheless, the economic docket is expected to show industrial output expanding 0.4% in May after unexpectedly contracting 0.4% in the previous month, with manufacturing advancing 0.3%, and the rise in production could spur a bullish reaction in the British Pound as the outlook for future growth improves. In addition, producer prices are projected to grow at an annualized pace of 5.7% for the second consecutive month in June, while input prices are anticipated to fall back to 10.2% from 11.2% in the previous month, and the stickiness in prices could stoke a shift in the interest rate outlook as inflation remains well above the central bank’s 2% target.

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