Fundamental Forecast for British Pound: Neutral

- Bank of England Maintains Current Policy in July
- Service-Based Activity Expands At Slower Pace
- Producer Prices Contract For First Time Since 2008

The British Pound held a narrow range as the Bank of England refrained from releasing a policy statement following its interest rate decision for July, and the exchange rate may continue to trend sideways over the coming week as investors weigh the prospects for future policy. However, the economic docket for the following week could spark a bearish reaction in the GBP/USD as the outlook for growth and inflation deteriorate, and the ongoing weakness in the private sector could lead the central bank to support the real economy throughout the second-half of the year as it aims to encourage a sustainable recovery.

At the same time, the International Monetary Fund lowered its growth forecast for the U.K. and sees economic activity expanding at an annualized pace of 1.2% this year versus an initial forecast for a 1.3% rise in GDP, while the group anticipates the growth rate to advance 2.1% in 2011 amid previous projections for a 2.5% rise as Prime Minister David Cameron aims to tackle the budget deficit and tighten fiscal policy. Meanwhile, a report by the Nation Institute of Economic and Social Research showed economic activity rose 0.7% during the second-quarter following the 0.3% expansion in the first three-months of the year, but the firm went onto say that “fiscal consolidation both in the U.K. and the euro area will restrict growth in the short term and there is clearly a risk that this rate of growth will not be maintained through the rest of this year” as households continue to face tightening credit conditions paired with the deterioration in the labor market. As a result, the BoE may hold a dovish outlook in its policy meeting minutes due out on July 21, but board member Andrew Sentance may continue to dissent against the majority and vote to raise borrowing costs in order to combat the stickiness in consumer prices.

Nevertheless, the headline reading for inflation is forecasted to fall back to an annualized pace of 3.1% in June from 3.4% in the previous month, while the core CPI is projected to weaken to 2.8% from 2.9% in May, which would be the lowest reading since December. In addition, the Nationwide consumer confidence survey is anticipated to fall back to 62 from 65 during the same period, while a report by the Bank of England is expected to show a GBP 3.5B drop in housing equity withdrawals, and the slew of data could drag on interest rate expectations as the BoE looks to support the economy going forward. However, claims of unemployment benefits are projected to fall another 20.0K in June following the 30.9K contraction in the month prior, with market participants forecasting the claimant count rate to weaken to 4.5% from 4.6% in May, and the improvement in the labor market could encourage an improved outlook for the economy as private sector consumption remains one of the leading drivers of growth.

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