Fundamental Forecast for British Pound: Bearish

The British pound pushed lower against the U.S. dollar this week and will likely continue its southern journey in the near term as debt fears in the Euro-Zone continue to rattle the markets. At the same time, a shift in investor sentiment may be in the horizon, which does not bode well the pound. With a light economic docket in the U.K. in terms of event risks, market participants should not rule out additional losses in the currency as risk aversion will likely be the main driver this week due to War concerns in Korea and debt contagion fears in the 16 member euro area.

The British pound has been under immense pressure as of late due to Ireland’s woes. Increased concerns surrounding Irish woes have rattled the U.K.markets due to the fact that banks in the region have a larger exposure to the Irish financial system than any other country. Indeed, Ireland announced that it has accepted an EU-IMF bailout. However, the exact figures have yet to be released, and so long as concerns in the bloc remain, Great Britain will likely fell the impacts of any market reaction. Going forward, market participants will shift the spotlight to Portugal and Spain. Taking a look at the fundamental developments from last week’s session, the only notable event was the economic activity report. Figures rose 0.8 percent in the third quarter, which was in line with economists’ expectations. Next week, GBP traders will face nationwide house prices, net consumer credit, and the M4 money supply. The housing index is of great importance due to the fact that it can precurse broader inflationary pressures. At the same time, PMI services, construction, and manufacturing are all on tap and will provide market participants with a gauge regarding future outlook. On another note, the docket in the world’s largest economy is filled with event risks, specifically the market moving non-farm payrolls report. A better than expected report may fuel momentum in the U.S. dollar as the currency reverses course from its southern voyage.

Taking a look at price action, the GBPUSD has broken below its rising trend line dating back to the middle of May, which is indicative of further losses. At the same time, the MACD continues to point to additional downside risks, while our speculative sentiment index stands at an extreme of 2.48, and signals for declines in the near term. All in all, remain short the British pound this week as technical indicators continue to point to downside risks. Gains should be capped by the 1.5950 area.

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