British Pound to Look Past BOE Minutes, Focus on Risk Appetite Trends
Fundamental Forecast for British Pound: Neutral
- British Pound Remains in Choppy Range vs. US Dollar
- Risk Appetite Continues to Dominate GBP Price Action
- Speculative Sentiment Warns of British Pound Breakdown
- BOE Sees Rate Cut as Counter-Productive, Minutes Show
The British Pound remains closely anchored to risk sentiment trends, with GBPUSD showing a firm 0.79 correlation with the MSCI World Stock Index. This keeps investors’ focus on familiar big-picture themes: the slowdown in global economic growth and the festering Eurozone debt crisis. Minutes from this month’s Bank of England monetary policy meeting are unlikely to prove meaningfully market-moving. Investors have already had ample time to digest the quarterly inflation report that served as the basis for the sit-down so the minutes release is unlikely to offer anything materially new that has not been priced in already.
On the growth front, a busy docket is ahead. In the US, July’s Retail Sales report and Augusts’ preliminary University of Michigan Consumer Confidence reading will help establish the degree of follow-through on the stronger-than-expected jobs growth figures published earlier this month. The Empire and Philadelphia Fed manufacturing surveys will also kick off the August set of leading activity indicators, offering a timely read on momentum behind the world’s top economy heading deeper into the third quarter. In the Eurozone, all eyes will be on second-quarter GDP figures. While a negative print will not be surprising – indeed, a recession in the region is readily accepted as common knowledge at this point – the degree of downturn will be important to monitor and may prove market-moving after the ECB downgraded its outlook for the region last week.
In reading the economic calendar, the markets are likely to take releases at face value, interpreting them in terms of their implications for growth rather than stimulus expectations. With disappointing Fed and ECB monetary policy announcements just behind them, investors’ hopes for accommodation are unlikely to return until all eyes turn to the Jackson Hole central bankers’ summit later this month. In the meantime, soft economic data that points toward a global recovery struggling to maintain momentum is likely to yield a sentiment-negative impact on price action. That means soft readings on next week’s stock of event risk are likely to see the British Pound following stocks lower. Needless to say, supportive outcomes stand to produce the opposite result.
On the Eurozone side of the equation, the supply of established flash-points is limited to Italy’s release of June’s public finance statement. The document will help gauge the degree to which the third-largest economy in the currency bloc is in danger of following Spain down the road to acute sovereign stress. Headline sensitivity remains significant however as traders anxiously wait for details on the many moving parts of the current landscape still clouded in uncertainty, including the “non-standard” measures being hashed out at the ECB and a possible Spanish bailout request. Importantly, risk aversion from this side of the thematic spectrum may prove less damaging to Sterling than growth-related worries as traders look to the UK currency as somewhat of a regional haven asset.-IS