Fundamental Forecast for British Pound: Bullish

The British pound outperformed against its currency counterparts as the Bank of England dropped its dovish outlook for inflation, and the GBP/USD may continue to trend higher over the following week as investors scale back speculation for further easing. As the pound-dollar maintains the upward trend from May, we expect the pair to make another run at 1.6300, but the BoE minutes due out on November 17 is likely to set the tone for future price action as market participants weigh the prospects for monetary policy.

There is likely to be a 7-1-1vote count as board member Andrew Sentance votes for a 25bp rate hike while Adam Posen sees scope to expand quantitative easing further, but there could be a growing splitwithin the MPC as the economic outlook remains clouded with uncertainties. As the central bank forecasts inflation to hold above target throughout 2011, members of the MPC may heed to Mr. Sentance’s call given the stickiness in price growth, and the central bank may adopt a hawkish tone going into 2011 as policy makers expect the recovery in the U.K. to gather pace over the following year. As the BoE talks down expectations for another expansion in quantitative easing, the GBP/USD may retrace the decline from earlier this year as interest rate expectations improve, and we may see the British pound continue to outperform against its currency counterparts over the near-term.

Nevertheless, a report due out next week by the U.K. Office for National Statistics is expected to show the headline reading for inflation hold steady at an annualized pace of 3.1% for the fourth consecutive month in October, and the data could spark a bullish reaction in the British pound as the CPI continues to hold above the government’s 3% limit for price growth. However, a separate report is anticipated to show claims for unemployment benefits increase another 5.0K during the same period after expanding 5.3K in September, while retail spending is forecasted to increase 0.4% after unexpectedly contracting 0.2% in the previous month. The mixed batch of data from Britain could spark choppy price action in the exchange rate as investors weigh the prospects for a sustainable recovery, but the BoE minutes is likely to set the tone for future price action as the central bank raises its outlook for growth and inflation.

DailyFX provides forex news on the economic reports and political events that influence the forex market.