Fundamental Forecast for British Pound: Neutral

- U.K. PMI Manufacturing falls to 53.4 versus expectations of 53.8
- Mortgage Approvals decline for fourth straight month
- U.K. Final 2Q GDP reading unchanged at 1.2%

The British Pound ended the week virtually unchanged as dovish comments from policy makers were offset by a brightening outlook for the global economy. BoE member Adam Posen forecasted where his vote may lay, stating that there was a clear case for additional quantitative easing. Strengthening Chinese and continued (albeit weaker) expansions in the U.S. and U.K manufacturing sectors helped reverse growing pessimism on the back of QE talk from policy makers. The lack of conviction amongst bulls and bears could signal the potential for a reversal, where a catalyst could be found on a economic docket full of event risk. A BoE rate decision and U.S. non-farm payroll report both have the ability to set the balance in the greenback’s favor over the medium term.

Adam Posen wasn’t the only MPC member on the wires with Paul Fisher opposing his counterpart’s statements, insisting that the central bank wouldn’t expand its Special Liquidity Scheme. The policy maker stated that there were other alternatives that would come through a fiscal operation and would be a decision that involves more than just the central bank. Therefore, even if a case can be made for additional asset purchases, any action may need to be weighed against the intended course of action from the new coalition. Considering the last vote was 8-1 to remain on hold, with the lone dissenter Andrew Sentence-who is advocating a rate hike, it is very unlikely that we will see any change from the BoE.

Therefore, the policy meeting could become a non-event as it has been the past 18 months with the final tally generating a greater impact when the minutes are released. Nevertheless, we could see markets start to hedge against a potential increase in QE especially following the PMI service reading as the sector accounts for 70% of the economy. Manufacturing and construction data should also be monitored as they will provide insights into the strength of the recovery and the need for additional stimulus. A surprise from the central bank can’t be ruled out as we have seen credit conditions tighten considerably, with mortgage approvals declining for a fourth straight month. Unexpected QE could sink the sterling leading to a retracement of recent gains. The GBP/USD is potentially putting a double top adding to a bearish case.

However, the main event risk could come from the U.S. non-farm payroll report as the status of the labor market in the world’s largest economy as impactions for global growth. Indeed, the GBP/USD has seen its correlation with risk rise to 57% and the labor report will have a significant impact on investor sentiment.

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