GBP Fundamental Analysis 19 August 2009

By: William Doody
Trading in the British Pound is sure to be volatile on Wednesday, when minutes of the most recent Bank of England MPC are released. In light of the surprise decision to significantly expand the BOE’s quantitative easing program – a move which has led to a sharp pullback in the Pound against major currencies – traders will be eager to examine the reasoning behind the closed doors of the Bank’s headquarters. There is little to suggest that what they learn from the minutes will be positive. On the contrary, the BOE’s move indicates that the members of the MPC have substantial concerns as to the prospects for continued economic recovery in the balance of the year. As we wrote shortly after the Bank’s policy decision, we view these actions as a decided negative factor for the Pound.

Currency traders will have an additional release to contend with on Thursday, as U.K. retail sales data are announced. Analysts currently forecast positive growth for both the month-over-month and year-over-year comparisons. However, in both cases, their prediction is for a slowing rate of growth over figures from June. The implications of this are clear – rather than an accelerating economic recovery, Britain seems locked in a stagnant one. Perhaps it was data such as this that led the MPC to expand the quantitative easing program so suddenly and drastically. A negative surprise in the data would be a sharp negative for the Pound.

Trading recommendations: Close long GBP positions / consider short GBP position