Fundamental Forecast for British Pound: Bullish

The sterling continued to pare some of the steep declines seen early in the month with a weekly advance of nearly 1 percent against the greenback. Although the economic calendar was rather subdued out of the UK this week, stronger than expected prints on September nationwide house prices and August Mortgage approvals helped fuel the pounds assault. Topping the data was a better than expected print on the GfK consumer confidence survey which gained one point in September to -30, marking its first advance in four months. However as risk appetite quickly tapered off late in the week, the sterling came under pressure as demand for haven assets surged.

Concerns that the fragile recovery may be faltering has increased pressure on the Bank of England and the MPC to act in time to avert a possible double dip recession scenario. Comments from the BoE’s Chief Economist Spencer Dale fueled speculation that the central bank will act after he cited expectations for inflation to exceed 5% in the coming months. And with the outlook for the UK economy calling for continued sluggish growth coupled with persistently high unemployment, the decision to inject added liquidity into markets sees an increased risk of stagflation.

Next week’s economic docket is highlighted by PMI manufacturing data, 2Q GDP, and the October BoE interest rate decision. Manufacturing is expected to contract further in September with consensus estimates calling for a print of 48.8, down from a previous read of 49.0. On Wednesday, the final reading on 2Q GDP is expected to mirror the previous print of 0.2% q/q and 0.7% y/y. Traders will be eagerly anticipating the Bank of England rate decision on Thursday. Although the Credit Suisse overnight swaps are only factoring in a 3% chance that the central bank will cut the benchmark rate, investors are anticipating that the BoE will move to expand asset purchases £250 billion from £200 billion. Such a scenario would undoubtedly put added pressure on the pound which was the top performer against the greenback this week.

Risk to the sterling remains weighted to the downside ahead of next week’s rate decision with topside resistance eyed at the 100% Fibonacci extension taken from the April 28th and August 19th crests at 1.5650, backed by the 1.57-figure and 1.5760. Interim support rests at 1.5540 with subsequent floors eyed at 1.5470 and 1.5340. Longer term targets are held at the 161.8% Fibonacci extension at 1.5050.

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