Fundamental Forecast for British Pound: Bullish

The Bank of England is scheduled to hold its interest rate decision in the week ahead, but market participants may show a fairly muted reaction to the policy meeting as the central bank is widely expected to maintain its current policy stance in September. According to a survey by Bloomberg News, all of the 41 of the 42 economists polled see the asset purchase target being held at GBP 200B, while the Monetary policy committee is anticipated to keep the benchmark interest rate at the record-low of 0.50% in an effort to balance the risks for the region.

However, the BoE policy meeting minutes due out on September 21 could highlight a growing shift within the MPC, and the committee may show an increased willingness to expand monetary policy further as the region faces an increased risk of a double-dip recession. After scaling back his vote to increase the benchmark interest rate by 25bp, board member Martin Weale talked up speculation for additional monetary easing, stating that he does not rule out increasing the asset purchase program beyond the GBP 200B target during an interview with a U.K. newspaper. In light of the recent comments, a further deterioration in economic activity could fuel concerns of undershooting the 2% target for inflation, and we may see a growing shift within the committee as Adam Posen maintains his push it expand quantitative easing by another GBP 50B. Moreover, Mr. Posen encouraged central banks across the industrialized countries to implement additional monetary stimulus after downplaying the risk for inflation, and went onto say that the nonstandard tool has a ‘positive significant impact’ in stimulating the economy according to an interview with Reuters.

As the BoE maintains its current policy, we should see the central bank refrain from releasing a policy statement, and market participants may a greater reaction to the production data on tap for next week as investors weigh the outlook for a sustainable recovery in the U.K. At the same time, the producer price report could raise the risk for inflation as the headline reading is expected to expand at the fastest pace since 2008, and a stronger-than-expected print could instill a bullish outlook for the sterling as heightening price pressures dampen the likelihood for additional monetary easing. In turn, the rebound from 1.6131 may gather pace in the days ahead, and the GBP/USD may continue to recoup the losses from the previous month as the pair appears to have carved a short-term bottom just ahead of the 200-Day moving average at 1.6117.

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