Fundamental Forecast for British Pound: Bearish

While most of the major currencies have become firmly anchored to broad-based trends in risk sentiment, the British pound has stubbornly refused to fall in with the heard, opting to remain preoccupied with relative monetary policy considerations. Indeed, GBPUSD continues to track closely with the spread between UK and US December 2011 interest rate futures, a gauge tracking investors’ priced-in expectations for where Bank of England borrowing costs will stand relative to those of the Federal Reserve by the end of the year.

Needless to say, this puts the spotlight on the publication of minutes from the Bank of England’s April policy meeting in the week ahead. The release has become the central event shaping monetary policy expectations for the BoE given the central bank’s penchant to remain mum at the time of the actual rate decision. As usual, traders will be concerned with two elements of the report: first, the voting pattern on the rate-setting MPC committee; and second, the comments from the moderate policymakers seen as possible targets to be lured over to the hawkish camp.

The last rate decision saw a 6-3 vote in favor of keeping borrowing costs and the QE asset-purchase target unchanged. This means the hawks need two more votes to force their view on the committee, with Charles Bean and Paul Tucker being the swing votes most likely to switch sides. The BoE Governor Mervyn King is a bit of a wild card: while he has a long history of being an inflation hawk, he has done an about-face since the outbreak of the Great Recession in 2008, and getting him on the side of tightening is probably wishful thinking at this point.

Keeping all of these considerations in mind however, it is far from guaranteed that the minutes release will amount to something still relevant for the monetary policy debate. In the two weeks since the BoE sit-down, inflation figures showed price growth slowed for the first time in six months in March and other leading economic indicators turned noticeably sour, with a Citigroup gauge tracking positive UK data surprises violently breaking the uptrend in place since mid-February. With that trajectory in place, a rate hike in the near-term seems decidedly out of the question. If the MPC minutes validate such views with another 6-3 vote accompanied by no change in underlying rhetoric, the Pound could be in for a selloff as tightening bets unwind.

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