GBP/USD Monthly Fundamental Forecast July 2012

Outlook and Recommendation

The GBP/USD closed the month at 1.5703

With the US in risk aversion safe haven mode all month, it was difficult for any of its trading partners to mount any momentum. Sterling retraced 2% of its spring losses in June and has stabilized into July, even as the BoE initiated another round of asset purchases, bringing the total size of the program to £375bn. As we look out to quarter end, we expect GBP to retrace more of its spring losses as it benefits from flows driven from its triple-A status and intra-European diversification. The CFTC reports that net position on GBP is flat; while technicals suggest the currency is likely to trade within a range.

The UK economic outlook weakened further over the last month, and we have lowered our growth forecast through 2013. The final estimate of first quarter GDP was revised down, from -0.1% y/y to -0.2%. We now expect a negative GDP print in the second quarter (given the drag from a lost working day and abnormally poor weather), implying average growth of 0.2% in 2012 and 1.5% in 2013. The domestic recovery is being obstructed by spillovers from the euro zone crisis, with sapping confidence affecting the real economy. The closely watched PMIs have deteriorated anew, with the manufacturing and construction indices dropping below the neutral 50-mark, and the services PMI reaching its lowest level since October. The outlook (including the inflation picture) has weakened enough to prompt the monetary and fiscal authorities to step in with more accommodative policy. The Mansion House speech in mid-June included a joint government-Bank of England (BoE) scheme known as “funding for lending”, whereby banks will be provided with multi-year funds (as much as GBP 80 billion) at below market rates, conditional on them subsequently lending to the non-financial sector. The BoE then announced an expansion of its quantitative easing (QE) program with an additional GBP 50 billion in bond purchases, bringing the total to GBP 375 billion

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Central Bank Name: Bank of England

Date of next meeting or last meeting: Jul 05

Current Rate: 0.50 % (- 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 continue with its program me of asset purchases totaling £325 billion financed by the issuance of central bank reserves. 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 July affecting EUR, CHF and GBP