Fundamental Forecast for British Pound: Bullish

The British pound made another run at 1.6000 heading into November, and the U.K. currency may continue to trend higher over the following week as market participants scale back speculation for another round of quantitative easing. The Bank of England is widely expected to maintain its current policy next week as the economic recovery in Britain slowly gathers pace, and the central bank may drop its dovish tone as inflation continues to hold above the government’s 3% limit for price growth. As a result, we may see the GBP/USD make its way towards the 23.6%Fibonacci retracement from the 2009 low to high around 1.6220-30 in the coming weeks, and the pound-dollar may continue to pare the decline from earlier this week as it maintains the upward trend from May.

A Bloomberg News survey shows 38 of the 40 economists polled forecast the BoE to hold the benchmark interest rate at 0.50% and maintain the asset purchase target at GBP 200B, while investors are pricing a 4% chance for a 25bp rate hike according to Credit Suisse overnight index swaps. As speculation for further easing subsides, the British Pound could show a bullish reaction to the rate decision even if the central bank refrains from releasing a policy statement and we expect board member Andrew Sentance to push for another 25bp as the economic outlook improves. However, MPC board member Adam Posen may spark a three-way split within the central bank as he maintains a highly dovish outlook for future policy, and market participants will certainly look towards the BoE minutes due out on November 17. However, as the central bank is scheduled to deliver its quarterly inflation report on the 9th, comments from Governor Mervyn King could take some steam out of the minutes as investors weigh the prospects for future policy. Nevertheless, the BoE minutes should be able to carry its own weight as we look forward to the vote count, and a three-way split within the MPC could bear down on the recent rally in the British Pound as the central bank stands ready to move monetary policy in either direction.

However, currency traders may show little reaction to the BoE interest rate decision given the slew of heavy event risk scheduled for the following week, and the GBP/USD may hold steady ahead of the highly anticipated FOMC interest rate decision as investors expect the Fed to expand quantitative easing further. At the same time, U.S. non-farm payrolls are forecasted to increase for the first time in five-months, with market participants projecting employment to increase 60K in October, and the release could harbor a comprehensive outlook for future price action as investors weigh the outlook for global growth.

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