Fundamental Forecast for British Pound: Neutral

-- Pound Rallies Subsequent to BoE Minutes
-- British Pound Bias Near-Neutral on Indecision

The British pound finished slightly lower against the U.S. dollar this week, down some 0.35 percent through Friday’s close. With the passing of the Bank of England minutes and the inflation report for the month of July, GBP traders will now shift their focus to the GDP report as downside risks remain capped by the 200 day moving average.

During this past week, the Bank of England minutes for the month of August showed that the decision to keep interest rates unchanged was not unanimous for a third successive month as Andrew Sentance was once again the lone dissenter, calling for an increase of 25 basis points to 0.75 percent. At the same time, the BoE said that risks of inflation expectations may be deanchored. This move by Andrew Sentance was indeed expected; however, a shift from another policy to call for a rate increase failed to serve as the catalyst needed for the British Pound. Rather, the committee reflected uncertainty regarding the near term outlook for growth and inflation as they carefully considered monetary tightening and easing. In turn, this uncertainly may lead the slit amongst policy makers to widen over the upcoming months. Meanwhile, inflation slowed to 3.1 percent in July from 3.2 percent the previous month, and lead Governor Mervyn King to write a letter to the Chancellor of the Exchequer George Osborne. With the shorter term outlook confirmed, policy makers stated that inflation will stay higher before slowing to about 1.5 percent in two years, below the 2 percent target. In turn, the GBPUSD will likely face increased volatility over the next couple of days as market participants digest the recent developments in conjunction with the effects of the increase in the value added tax measures in 2011.

For this upcoming week, broader risk trends will likely dictate GBPUSD price action as GBP traders face a light economic docket. The second reading for economic activity in the second quarter is expected to remain unchanged from the previous reading at 1.1 percent. Economic expansion surpassing economists’ forecasts will likely raise concerns about inflationary pressure, and provide reasoning for Mr. Sentance’s push for a rate hike. With regards to price action, the GBPUSD has reversed course at the 6 month high, and is now testing the 200-day SMA for support. This level is of particular interest in that prior to rising above this moving average, this line has held as a key level of resistance for 5 months. Also worth noting is the 50 day SMA displaying a positive slop, and now looks poised to crossover above the longer trending 200 day moving average, which is indicative of additional gains. Indeed, taking a long GBPUSD position at the moment could set the stage for a profitable trade. However; waiting for a clear break above 1.5700 may protect against any unforeseen losses as price action remains capped by that level.

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