Fundamental Forecast for British Pound: Neutral

The British pound has reclaimed its correlation to broad-based trends in financial market risk sentiment, with the correlation between GBPUSD and the MSCI World Stock Index at a six-week high on 20-day percent change correlation studies. Initially, this puts the onus on the outcome of the G20 finance ministers’ summit taking place in South Korea over the weekend. The remainder of the week will be shaped by another round of speeches from Federal Reserve officials and a long earnings calendar.

Looking first at the G20, traders have seen conflicting cues on the agenda to be pursued from US Treasury Secretary Tim Geithner. The world’s top economy seems to be focused on two issues: avoiding the breakout of a “currency war” and lingering global trade imbalances. Early in the week, Geithner noted at a speech in California that the US “will not engage” in competitive devaluation, saying this was not a means to prosperity, and pledged to preserve confidence in a “strong dollar”. Later in the week however, a letter from Geithner to his G20 counterparts said that countries with a persistent trade surplusshould use policy tools including the exchange rate to reduce those imbalances. This latter statement implies the US is looking for the currencies of surplus nations to strengthen against the Dollar, which directly contradicts what he said earlier. Needless to say, this creates plenty of opportunities for volatility as traders remain jittery about how policymakers’ attempts to fine-tune the world economic order will impact the fragile (and cooling) global recovery.

Later in the week, the spotlight will turn to another batch of speeches from Federal Reserve officials as the evolving debate about renewed monetary stimulus turns to the mechanics of what such an outcome can practically look like ahead of the November 2nd FOMC policy announcement. Most of the action is on tap for Monday, with Fed Chairman Ben Bernanke, New York Fed President Bill Dudley, and St. Louis Fed President Jim Bullard all set to hit the wires. Another hefty dollop of third-quarter earnings reports will set the backdrop, with 176 S&P 500 companies set to report results. Of the 132 firms that have already published earnings, outcomes have surprised to the upside by 10.1 percent on average. A continuation of this trend seems broadly supportive for risk sentiment (and by extension the British pound), but markets are forward-looking and the prospects of turmoil ahead that may emerge from the G20 or Fed commentary can certainly overshadow optimism.

The domestic economic calendar may also prove to undermine any support that sterling can conceivably win from robust risk appetite as preliminary third-quarter GDP figures show the economy added just 0.4 percent in the three months through September having soared 1.2 percent in the preceding period. This threatens to reignite concerns about the onset of austerity and its implications for the economy, especially after Chancellor George Osborne detailed the extent of the painful cuts to public spending last week.

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