Fundamental Forecast for British Pound: Bearish

The British pound lost approximately 1.79 percent against the greenback this week as the European debt concerns continue to rattle the markets, while the fundamental developments in the U.K. begin to paint a bearish picture for the pound ahead of the largest spending cuts since WWII. As the technical outlook continues to point to additional losses in the GBPUSD, traders await the Bank of England Minutes for confirmation. Indeed, markets participants will likely face a three way split, but if another member calls for a rate hike or asset purchases the currency market could witness a sharp intraday move as the markets face low liquidity amid the holiday season.

Ahead of the Bank of England minutes, the economic docket this past week was mixed, but the disappointing results outweighed the benefits. Consumer prices in November rose an annualized 3.3 percent after climbing 3.2 percent in October. Indeed, the advance in inflation marks the highest level since May. Heading in 2011, prices are predicted to remain at their elevated levels amid the increase in value added taxes which will rise to 20.0 percent from 17.5 percent. The outcome validates policy maker Andrew Sentence call for a rate hike as inflation remains stubbornly above the central bank’s target. Moreover, the gain in retail sales this past week, shows stronger consumer demand and supports the gain in consumer prices. However, the dismal jobless claims report which trailed the inflation release quickly reversed any optimism of a rate hike as figures dropped a mere 1.2K in November amid forecasts of -3.0K, while the ILO unemployment rate during the three months ending in October climbed to 7.9 percent to mark the highest level since October. This is concerning for the central bank, and in particular Adam Posen as he voices out increasing the countries asset purchases.

These developments are worth noting heading into the Bank of England minutes this week, and may pave the way for another policy maker joining Andrew Sentance or Adam Posen. On the other hand, market participants should not rule out any change from last month’s vote as some policy makers take the wait and see approach heading into 2011 in order to assess the impacts of the spending cuts. Also on tap next week will be the GfK consumer confidence survey, public finances, and gross economic activity. Though the economic docket in the region is filled with a slew of events, risk trends may dictate price action, while debt contagion fears in the Euro-Zone spillover into the U.K. Moreover, with Moody’s investor service seeming very active as of late, downgrading Ireland to Baa1, and placing Greece’s credit rating on review for downgrade, it may be a matter of time before comments regarding Great Britain’s growth outlook comes to light.

Taking a look at price action, the GBPUSD has halted its two week advance and now looks poised to continue its southern journey heading into 2011 as technical indicators on the weekly chart point to further losses. The MACD has crossed over to the downside, which is indicative of losses. Lastly, our speculative sentiment index stands at 2.21, providing a contrarian signal to sell.

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