Fundamental Forecast for British Pound: Neutral

The British pound continued its northern journey against the U.S. dollar this week on the back of greenback weakness. As of late, quantitative easing concerns are weighing on the greenback, and the recent comments by the U.S. central bank head may add additional weight onto the buck as the outlook for the world’s largest economy remains unclear. Indeed, the Bank of England held rates at 0.5 percent and maintained its asset purchase target at its rate decision meeting earlier this month. Traders will now shift their focus to the meeting of the minutes on October the 20th as the split amongst policy makers will likely widen in the upcoming months amid uncertainty in Great Britain’s near term prospects.

The Bank of England’s minutes are expected to show policy member Andrew Sentance continuing to push for a rate hike as inflation remains stubbornly above the central bank’s target. It is noteworthy that consumer prices are unlikely to weaken in the near term as the recently proposed value added tax (VAT) measures will continue to keep prices around their current levels. Meanwhile, committee member Adam Posen of late argued for a second round of quantitative easing in order to avoid a period of deflation. Supporting Mr. Posen is Prime Minister David Cameron as he said he would look to monetary policy to support growth versus fiscal tightening. All in all, the minutes of the meeting may pave the way for the next moves in the British pound, with the possibility of a three way split. Besides Wednesday’s event, GBP traders will face the right move house prices, M4 money supply, and retail sales. The latter is of particular interest in that retail sales serves as a gauge of consumer demand. Thus, a reading exceeding economist’s estimates of 0.2 percent will be interpreted as a fresh round of optimism despite unemployment claims advancing for the second straight month in September, and posting the largest increase in eight months.

Market participants should not overlook the developments in the world’s largest economy as the U.S. dollar is currently at the crossroads against the British pound. Indeed, the greenback is down approximately 1.00 percent this week against the pound as the QE concerns in the U.S. weigh on the buck. Furthermore, today’s release of consumer prices provides support to Chairman Ben Bernanke’s comment that inflation is low. Annualized prices rose 1.1 percent in September amid expectations of 1.2 percent, while the core rate advanced at the slowest pace since the early 1960s.Going forward, I expect interest rates in the world’s largest economy to remain at their current levels until at least the third quarter of next year. The U.S. dollar faces another loaded week of economic data. Disappointing reports will further fuel greenback selling; however, if releases top expectations in conjunction with less reiterate of QE, the U.S. dollar could begin to cover from its levels.

From a technical standpoint, the GBPUSD has bounced off of the 20-day moving average in addition to breaking above the psychological 1.60 level. If price action can manage to close above this level, this could spell trouble for the greenback as technical studies as of late point to further gains in the pair. The MACD has failed to crossover to the downside, while our speculative sentiment index stands at -1.56, and signals for further increases. Nonetheless, my user defined parabolic SAR has flipped, and is now calling for additional gains.

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