The pound broke above the key 2.000 level for the first time in nearly two months in early London trade as the unit continued to attract speculative flows on the belief that BoE will raise rates at the upcoming MPC meeting in July. This week the UK calendar is extraordinarily light with only GDP and GFK Consumer Confidence survey of any import of the docket. The GDP is expected to print in line with recent trend and by itself is unlikely to motivate the BOE to raise rates further. However, the unexpectedly large growth in money supply figures is likely to continue to weigh on the policymakers minds, with UK media suggesting over the week-end that the MPC members are frustrated with the recent lags between policy action and market impact.

Nevertheless, the true surprise could come from lower than expected figures in both releases which would force a rethink of the present operating assumption that 5.75% in July is done deal. The Consumer Confidence numbers appear to be particularly vulnerable to a down tick given the rise interest rates and the high cost of energy. A recent Ernst and Young report stated that “The average UK household now has a lower proportion of its monthly income to spend on discretionary purchases than at any time in the last five years - after tax contributions, mortgage payments and monthly household bills, the average family now has just over 22% of its gross income left over, as opposed to over 28% in 2003.” Much like the Fed, the BOE appears to be trapped between rock and a hard place as its must balance the needs to fight inflation at the possible risk materially slowing down economic growth. For the time being the market clearly favors the rate hike outcome, but this week’s UK Consumer data – if it prints below forecast - may force cable bulls to temper their enthusiasm.

Pound strength of course is not only dependent on UK fundamentals but on the developments in US as well. The unit could still rally despite the fact that BoE keeps rates stationary if US conditions deteriorate significantly. Last week the US capital markets were jarred by growing problems at the Bear Stearns hedge funds. Although Bear Stearns was forced to risk 3.2 Billion dollars of its own capital to rescue the funds, fears persist that these problems were only the tip of the iceberg. The biggest worry is that the Bears Stearns fiasco may force a downward revaluation in trillions of dollars worth of housing related securities creating massive liquidity problems in US financial system which in turn would materially increase the risk profile of all US assets.

This week the Bear Sterns story will no doubt continue to hover in the background as focus will once again turn to the housing sector as both Existing and New Home Sales are due Monday and Tuesday. The markets are looking for weaker data and it will be especially interesting to see the impact of rising mortgage rates on the transactions in May, although the full effect of the spike in rates is not likely to be reflected until June’s data. In either case, the calendar offers little cheer to dollar longs, but an inline or slightly better than expected result – especially one that exceeds the psychologically important 6MM annual rate level -could spur some covering of dollar shorts providing a short term boost for the currency.

Boris Schlossberg is a Senior Currency Strategist at FXCM.