Fundamental Forecast for British Pound:Bearish

The British Pound struggled to hold its ground on Friday and the sterling may continue to give back the rebound from 1.5422 as the economic docket is expected to highlight a weakened outlook for the U.K. Indeed, we’re expecting to see a drop in production paired with a slower rate of inflation, and the protracted recovery in Britain is likely to weigh on the exchange rate as it raises the risk of a double-dip recession.

At the same time, the Bank of England is scheduled to meet next week, but market participants may overlook the rate decision as the central bank is widely expected to keep the benchmark interest rate at 0.50% while maintaining its asset purchase program at275 billionGBP. As Chancellor of the Exchequer George Osborne unveils a GBP 40B credit-easing program to stimulate the ailing economy, it seems as though we will see the BoE carry its wait-and-see approach into the following year. However, the meeting minutes due out on December 21 could highlight an increased willingness to expand policy further as Governor Mervyn King sees an increased risk of undershooting the 2% target for inflation. As the central bank turns increasingly cautious towards the economy, market participants see the Monetary Policy Committee expanding the Asset Purchase Facility by another GBP 100-200B over the coming months, and expectations for additional monetary support is likely to dampen the appeal of the sterling as the fundamental outlook for Britain deteriorates.

As we’re expecting to see a slew of dismal data coming out of the U.K., the pullback from the weekly high (1.5779) looks poised to gather pace, and sterling may make a run at the October low (1.5273) as the fundamental outlook for the region turns increasingly bleak. One key level to watch will be the 20-Day SMA (1.5745) as it appears to acting as resistance, and the bearish crossover in the moving averages point to further declines in the GBP/USD as it carves out a lower high coming into December.– DS