GBP/USD Monthly Fundamental Forecast August 2012

Outlook and Recommendation

The GBP/USD closed the month at 1.5668 remaining strong, until after the release of disappointing GDP data showing that the UK had slipped into double dip recession.

The domestic fundamentals have deteriorated, the country’s close ties into the euro zone threaten it further and its triple-A rating is under threat. There are increasing calls for aggressive action by the central bank. Technicals suggest GBP is ranging, while the option market has positioned itself increasingly for GBP upside. Sentiment has deteriorated – according to the CFTC; traders now hold a net short -$0.3 billion GBP position. The GBP outlook has weakened but has not broken. We hold a Q312 forecast of 1.55.

A particularly disappointing second quarter performance and indications that underlying economic momentum is weaker than previously envisioned have undermined the growth story in the UK considerably. According to the advance estimate, output contracted 0.7% q/q in the three months to June, marking the third quarter of the nation’s double-dip recession. The loss is largely attributable to an extra bank holiday in June and inclement weather throughout the period and a significant rebound is expected for the third quarter on the back of both statistical effects and the Olympics. Nevertheless, the sub-50 PMIs in the manufacturing and construction sectors (and a reading not far from 50 in the services sector), indicate that near term production prospects are negative. We have lowered our growth forecasts for this year and next to -0.4% and +1.2%, respectively. Moreover, the threat of contagion from the debt and banking crises in the euro zone continues to hang over the UK, with implications of severe financial destabilization, currency depreciation, and a possible credit rating downgrade, if the crisis escalates. In this weak economic and financial market context, and with inflation surprising on the low side for three consecutive months.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Central Bank Name: Bank of England

Date of next meeting or last meeting: Aug 02 (on August 2nd, the bank held rates and policy as expected)

Current Rate: 0.50 % at the time of this writing the BoE met and held rates.

Statement highlights of last meeting: The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%.  The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £375 billion. The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009.  A programme of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009.  The previous change in the size of that programme was an increase of £50 billion to a total of £325 billion on 9 February 2012.

Economic events for the month of August affecting EUR, CHF and GBP