GBP/USD Monthly Fundamental Forecast October 2012

Outlook and Recommendation

The GBP/USD closed September at 1.6140 after the US mounted a comeback at the very end of the month. The pair had broken above 1.63 just a week ago. In late September, GBP was flirting with 13-month highs vs. the USD.  Risk reversals and a shift in the GBP position from net short to long (CFTC), suggest that sentiment is favorable. Fundamentals are weak, but these are offset by other factors, including the UK’s “AAA” rating and its destination for inter-European flows. In addition on a relative basis, the currency foundation for GBP is stronger than it is for the USD, which faces loose monetary policy and uncertain fiscal policy.

A buoyant labor market, rising real incomes, a moderating pace of disinflation, and a comparatively favorable standing in global financial markets (thanks to the nation’s Triple-A credit rating and partial disconnect from the euro crisis) mean that the argument for more monetary stimulus from the Bank of England (BoE) is more marginal than it was. Though the growth outlook remains fundamentally weak, the first half of 2012 proved less downbeat than originally reported; second-quarter GDP was again revised higher in the final reading, to -0.4% q/q from an initial estimate of -0.7%, due to milder declines in construction and industrial production. This implies a smaller contraction for the year overall (-0.3%, versus -0.4% previously), further supporting the relative strength of the GBP. Employment data has been remarkably solid; the economy added 236,000 jobs in the three months to July, the most in two years, while the level of jobless claims has seen steep declines in recent months. This has sustained a robust pace in domestic demand, evidenced by average retail sales growth of almost 3% y/y in May-August. The external sector, however, is an increasing drag on the economy. Currency strength, combined with the recession on the continent and slower growth internationally, has pushed the UK’s trade and current account deficits to record levels

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 – The Bank of England

Date of next meeting or last meeting: Oct 04, 2012

Current Rate: 0.500%

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