The British pound has charged ahead through the close of the week with a break to a two-month high against the US dollar and a near five-month high against the Japanese yen. These are strong moves; but do they necessarily reflect the strength of the sterling itself or is this more the reflection of a rise in risk appetite?
British Pound Will Follow The BoE Rate Decision Despite Forecasts
Fundamental Outlook for British Pound: Bullish
- Despite a lack of details on executing its proposals, the G20’s assurances benefit the pound
- Consumer credit contracts for the first time in 16 years through February - a sign of dour economic conditions
- A two month high in GBPUSD hints at a reversal. Read the Technical Weekly report for a different view of the market
The British pound has charged ahead through the close of the week with a break to a two-month high against the US dollar and a near five-month high against the Japanese yen. These are strong moves; but do they necessarily reflect the strength of the sterling itself or is this more the reflection of a rise in risk appetite? Both the US dollar and Japanese yen are key safe haven currencies (which rise when traders are seeking to avoid waves in the financial markets and falling when the appetite for risk picks up). The better scale for the pound are euro and Australian dollar – both of which are still stronger than the British currency. However, will this be the case next week and the weeks beyond? For sterling traders, the long-term concerns still apply (even when measured up against an increasingly spread field of counter-currencies): is the United Kingdom the worst performing economy in the industrialized world; and is the country’s financial system set to suffer from additional implosions of key financial institutions?
To gauge this currency’s dependency on risk appetite, we can look back to last week’s top economic event – the G20 meeting. The market has generally accepted the IMF’s forecast that the United Kingdom would suffer the worst recession in the industrialized world through 2009. This is largely the reason for the Prime Minister Gordon Brown’s enthusiastic effort to produce a global and coordinated rescue plan that the group of international leaders would sign up to. With sentiment so pessimistic on the pound to begin with, the apparent success of the meeting easily leveraged a boost in sentiment for the pound. However, the policies laid out in the statement provides more sweeping proposals than the immediate action that investors and consumers were hoping for. Without clear timelines and contribution promises from members, skepticism will grow that fiscal aid will come close to stem the bleeding of the global economy. On the other hand, regardless of what global leaders can ultimately agree to, UK officials will continue to support their own economy. The government has shown a flexibility and timing with its policy that no other nation can match. While, the state of its economy and markets certainly warrants this response, it will eventually pay off while others could struggle to revive growth.
The impact of economic policy and health of one economy relative to its major counterparts are conditions that play out over a considerable time. In contrast, the event risk that populates the docket next week will have a far more immediate impact on price action – while further altering forecasts for the longer-term fundamental considerations. The list of scheduled releases due next week is certainly not lacking for potential. The most pressing event will be the Bank of England’s rate decision. Even though the MPC has cut rates to near zero (they are not expected to cut lowered any further; but even if they were, the market would not likely be surprised) and have been early adopters of unorthodox policy methods; the market will take heed of the group’s outlook. An improvement to the outlook for the economy and markets owing to the central bank’s and government’s efforts would be considered a key turn for the better for the pound. Such convictions must also be won by data. The consumer confidence report on Tuesday will gauge the consumer’s contribution to growth. Industrial production and visible trade will gauge the influence of two other major components of GDP. On Friday, the UK capital markets will be closed in observation of Good Friday. - JK
