GBP Fundamental Analysis-7 July 2009

By: William Doody
The British Pound has come under increasing pressure during the past several trading days as indications grow that economic recovery in the U.K. is tepid at best. Forecasts from several groups projecting continued economic weakness had already hurt the Pound prior to yesterday’s declaration by a leading business lobby that recovery “is not guaranteed”. The British Chambers of Commerce association recommended further monetary easing by the Bank of England during their July meeting scheduled for later this week, a move which would be sharply negative for the Pound. Matters were not helped by a report from the government Office for National Statistics indicating an unexpected drop in manufacturing from April to May. This latest data raises the unwelcome possibility of a “double-dip” scenario for the British economy.

Tensions are sure to be high in currency markets through the week as the Bank of England holds its July policy meeting on Thursday. Several analysts expect the BOE to extend its already announced quantitative easing program by an additional £25 billion. While an increase of this amount is most likely already priced-in by currency markets, any expansion of easing beyond that figure would be sharply negative for the Pound. Likewise, a pessimistic statement by the BOE would likely provoke further selling in Sterling.

We suggested on 29 June 2009 that currency traders should favor the U.S. Dollar over the British Pound in a straight USD-GBP trade based on our expectation of weak economic data in the U.K. It would be wise to take profits now, but we would still maintain a negative bias towards the Pound through Thursday’s BOE meeting.