Fundamental Forecast for British Pound: Bearish

The British pound slipped to a fresh monthly low of 1.5939 as the Bank of England struck a dovish tone for monetary policy, and the sterling is likely to face additional headwinds over the near-term as the slowing recovery in the U.K. spurs speculation for further easing. As members of the Monetary Policy Committee see scope to expand its asset purchase program beyond the GBP 200B target, the sharp reversal in the GBP/USD is likely to gather pace in the second-half of 2011, and the pound-dollar may threaten the rebound from earlier this year as interest rate expectations falter.

Although the final 1Q GDP report is expected to confirm a 0.5% expansion in economic activity, the slowing recovery in the U.K. could lead to a downward revision in the growth rate, and a dismal reading could exacerbate the reversal in the British Pound. However, a rebound in U.K. mortgage approvals paired with a faster pace of expansion in service-based should help to prop up the sterling going into the middle of the week as growth prospects improve. Nevertheless, the response could be short-lived as household confidence is anticipated to taper off in June, and the data would certainly dampen the outlook for the region as private sector consumption remains one of the leading drivers of growth. Should the bulk of the event risks scheduled for the final week of June fail to meet market expectations, the GBP/USD will continue to slide heading into July, and the rebound from January may come under pressure as investors raise bets for another expansion in QE.

As the central bank expects the slowdown in economic activity to persist ‘for longer than previously thought,’ the comments suggest that the MPC will preserve its current policy over the coming months, and we may see a growing shift within the committee as the fundamental outlook remains clouded with high uncertainty. As the BoE leaves to door open to increase monetary stimulus, the bearish sentiment underling the British Pound could drive the exchange rate back towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700 should the pair fail to hold above the March low (1.5936) in the week ahead.

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