Fundamental Forecast for British Pound: Neutral

-- British Pound Clears Resistance, Challenges 1.60 Level vs US Dollar
-- Bank of England Keeps Monetary Policy Unchanged as Expected

Monetary policy expectations will vie with risk sentiment for dominance over sterling price action, with GBPUSD once again showing a strong correlation (0.71) to the MSCI World Stock Index on 20-day percent-change studies.The path of least resistance is unclear however after last week’s US employment figures produced mixed results, offering little clarity about investors’ assessment of the health of the world’s largest consumer market and, by extension, the continuity of the global recovery. Indeed, the greenback sold off along with stock markets, with traders seemingly more in tune with the disappointing headline figure’s implications for monetary policy rather than the US currency’s safe-haven profile. Curiously, shares went on to erase most of their initial decline after the Private Payrolls figure printed much closer to expectations than the census-distorted Nonfarm Payrolls outcome, but the greenback remained under pressure and retraced less than half of the initial spike lower.

Looking ahead, a busy week of US economic releases promises to offer more clarity on the trajectory of risky assets. Needless to say, the most important of these will be the Federal Reserve’s interest rate announcement. While markets are unequivocally pricing in no chance of a change in benchmark borrowing costs, traders will doubtless pay close attention to the language of the statement and any clues this offers on where things go from here. On balance, a dovish lean seems likely considering the overwhelming evidence that the US economy will slow in the second half of the year. However, with the States amounting to the last viable engine of global growth, the outcome may prove supportive for the Dollar amid a return to widespread risk aversion. Indeed, Europe has been sidelined as it deals with its hefty debt burden, Japan remains mired in deflation, and China is willfully pulling on the brakes, spooked by fears of asset bubbles and runaway inflation. Alternatively, an extension of Friday’s dynamics may see USD come under renewed selling pressure as withering tightening expectations supersede the US currency’s safety benefits.

Turning to the domestic calendar, the spotlight falls on the Bank of England’s release of an updated inflation report, which this time aroundwill take into account the government’s ambitious austerity budget that aims to trim the public deficit by a hefty 6.3 percent of GDP by 2014-15. Mervyn King and company remained mum once again following last week’s rate decision, leaving traders still eager to size up the central bank’s take on the plan’s implications for economic growth and monetary policy going forward.Government spending has been a key driver of the UK recovery, hinting that the significant retrenchment on the fiscal side will call for monetary policy to (at least) remain at the current, accommodative setting for the time being to prevent a slide back into recession. Indeed, a convincing argument can be made for further easing despite stubbornly high CPI inflation as temporary upward pressures including a weaker sterling filter out of the equation.

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