Fundamental Forecast for British Pound: Neutral

- BoE Leaves Benchmark Rate, Asset Purchase Program Unchanged
- Industrial and Manufacturing Production in July Rose 0.3%, Led by Textiles
- Producer Prices Grow at Slowest Pace in Six-Months

The British pound remains range bound against most its counter parts as the Bank of England left their bench mark rate on hold for an eighteenth straight month. Policy makers also refrained from adding to their asset purchase program, which economists are expecting the MPC to re-start as credit conditions remain tight. The non-action wasn’t accompanied by a statement, leaving markets to guess whether Andrew Sentence remains the lone voice for tightening. The voting member’s concern over inflation above the government’s 3.0% threshold has raised the possibility that a rate hike could come in early 2011. However, if consumer prices follow the slower factory gate price growth seen in August, then more market participants could start to move into the "additional QE" camp.

The U.K. trade deficit in July widening to 8.7 billion pounds from 7.5 billion pounds as export demand slowed, will put added pressure on policy makers to fuel domestic growth. The central bank will face a difficult task as they have lowered growth forecasts, as they anticipate austerity measures from the new coalition government will become a weighing factor. Indeed, we may have seen a three way split at the last rate decision, with some members calling for a resumption of QE measures, as they look to ensure the recovery sustains. Industrial and manufacturing production growing 0.3% in July has helped erase fears of a double dip recession, potentially leaving the monetary authority on the sidelines through the end of the year. However, the National Institute of Economic and Social Research is forecasting growth slowed to 0.7% in the three months through August, from 1.3% the month prior, a trend that could spark action.

The upcoming economic calendar is full of event risk which could spark volatility but may not be enough to inspire breakouts for sterling crosses, with the BoE minutes scheduled for September 22. The most market moving release will be the consumer price report which is forecasted to ease to 3.0%, placing it at or above the government’s threshold for an eighth straight month. Inflation slowing below the level would open the door for additional QE and could be a catalyst for Sterling weakness. The employment report could stem pessimism, with forecast for jobless claims to decline for a seventh straight month by 3,000. Retail sales growth of 0.3% is also expected adding to sign that the recovery is sustaining. However, in line employment and consumption figures would reflect a lower measure of improvement for a third straight month, supporting broader growth concerns.

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