Though there was no data on hand out of the UK on Friday, the British pound continued its descent versus the greenback.
Like the Euro-zone, economic conditions in the UK look bleak as recent PMI reports reflect a three-month old contraction in the services, construction, and manufacturing sectors. Also like the Euro-zone, UK consumer prices are growing much faster than the central bank’s 2.0 percent target. However, unlike in the Euro-zone, the UK’s central bank has a dual mandate to maintain price stability and sustainable economic growth. As a result, it is far more logical to believe that the Bank of England’s Bank Rate will fall in line with the probabilities reflected by overnight index swaps, which are pricing in almost 50bps worth of rate cuts in the next year. While this may sound like enough evidence to sell the British pound, news out of the UK will go a long way to determine the currency’s next move. On Tuesday, UK CPI will hit the wires and on Wednesday, the BOE’s Quarterly Inflation Report will be released, though the latter is likely to be more important since forecasts for inflation and growth may be revised. Furthermore, critical support looms below near 1.90. Looking at the weekly charts, since breaking above the 200 SMA in June 2002, the level has served as solid support following multiple tests in August 2002, November/December 2005, January 2006, and March 2006. If GBP/USD breaks below this point, though, it will essentially signal that the pair topped out back in November 2007.
