By Ilya Spivak, Currency Strategist
Fundamental Forecast for the British Pound: Bearish
- British Pound Rally Finds Resistance at 1.59 vs. the US Dollar
- Speculative Sentiment Puts Pound at Multi-Month Extremes
- Second-quarter UK GDP Revised to Show Slightly Smaller Drop
- UK Housing Loans Edge Higher from the Lowest in 3.5 Years
A bare-bones domestic
economic calendar leaves the British Pound at the mercy of broader
market themes, putting the spotlight on the evolving outlook for global
economic growth and the festering Eurozone debt crisis. Sterling remains
anchored to risk appetite, with the benchmark GBPUSD exchange rate
continuing to show a strong correlation with the MSCI World Stock Index.
With that in mind, the UK unit may find itself under pressure as the
markets’ loss of patience with EU officials’ sluggish crisis-fighting
efforts and a disappointment of hopes for additional Fed stimulus make
for a risk-averse environment.
On the growth side of the
equation, all eyes will be on Friday’s Jackson Hole symposium and a
speech from Fed Chairman Ben Bernanke. The central bank chief used the
venue to unveil QE2 in 2010 and traders are speculating that the third
round of asset purchases may emerge this time around. Last week, a
dovish set of minutes from Augusts’ FOMC sit-down fueled bets on
imminent accommodation, but dismissive comments from St. Louis Fed
President James Bullard quickly poured water to the doves’ exuberance.
Bullard said the minutes were dated in light of the improvement in US
economic data through July and August, hinting the Fed may not see the
landscape as warranting a reboot of asset purchases. Top-tier US data
releases crossing the wires late into the week printed north of
expectations, seemingly reinforcing Bullard’s position.
Faced with these conflicting
cues, traders will closely monitor next week’s stock of manufacturing
survey data from the Dallas, Richmond, Kansas City and Chicago Fed
branches to set the stage for Bernanke’s speech. The Beige Book survey
of regional economic conditions and Augusts’ Consumer Confidence reading
will likewise meet with close scrutiny from investors. On balance, an
unequivocal nod toward QE3 seems unlikely. Medium-term inflation
expectations remain reasonably anchored near the Fed’s target 2 percent
rate and borrowing is materially cheaper than it was when QE2 emerged,
with Treasury bond yields sitting just off record lows. US has economic
data has also performed increasingly better relative to expectations
since mid-July, suggesting the need for added support is less than
urgent. That means the Fed is likely to reserve QE3 as an available tool
in its arsenal in the event that the mess in Europe triggers another
credit crunch akin to the aftermath of the bankruptcy of Lehman Brothers
in 2008.
Turning to the Eurozone,
last week’s anticlimactic developments in Greece and further stalling
from the ECB on its bond-market support program revealed investors’ frustration
with a lack of directional cues – whether positive or negative – from
Eurozone officials. Markets may be approaching a juncture where price
action forces policy once again, with risk aversion breaking out amid
signs of continued dithering. The focus will be on a meeting of German
and French finance ministers, a formal review of the EU/IMF bailout
program for Portugal, and a set of bond auctions from Spain and Italy
(where average yields and bid-to-cover readings will be closely
monitored as a gauge of funding stress). With little in terms of a
breakthrough likely on the horizon, a round of risk aversion may be
brewing to punish policymakers’ foot-dragging. Importantly, while such
an environment is expected to hurt the Pound against established havens
such as the US Dollar and the Japanese Yen, it may be uniquely supported
against the Euro as regional capital flows seek an alternative to the
single currency.
Source :www.dailyfx.com
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