Fundamental Forecast for British Pound: Bearish
The British Pound accelerated lower last week in the wake of the Bank of England inflation report that signaled policymakers would look past rising inflation and maintain a dovish posture. Although Britain’s most recent inflation reading put price growth at an above-target rate of 2.7 percent, BOE Governor Mervyn King emphasized that “delivering price stability in the medium term [should] avoid undesirable volatility in output in the short run”. Sterling broke to a new 6-month low on Friday as a disappointed Retail Start report released amplified selling pressure.
The central bank’s dovish lean reflects the weakness of the UK economy. Fourth-quarter Gross Domestic Product contracted by 0.3% as the temporary boost from the London Olympics waned. Meanwhile, exports have been dragged down by the poor performance in the Euro area. Seemingly strong employment growth is far from encouraging considering it is coupled with sluggish growth. Indeed, labor productivity has fallen back to levels unseen since 2005.
The coming week begins with the markets digesting the weekend’s G20 summit in Moscow, where finance ministers and central bank governors from group’s member countries are expected to clash about competitive devaluation of currencies, known as the so-called “currency wars”. Building agreement for concrete policy is unlikely considering so many G20 countries are themselves guilty of overt or implicit actions to weaken their exchange rates. Still, a final communiqué that is perceived to limit the scope for monetary stimulus may prove significant for the Pound given the BOE’s proclivity for QE, pushing the currency higher.
Looking further ahead, minutes from February’s BOE meeting come into focus. Although much of the central bank’s overall position will have been well-telegraphed by the quarterly inflation report already, the vote count for and against additional asset purchases will be interesting. This will help investors gauge the likelihood of additional stimulus in the near term and possibly pre-dating the BOE’s takeover by Governor-designate Mark Carney in the summer. Needless to say, such cues are likely to further punish the UK unit. January’s Jobless Claims data rounds out scheduled event risk.