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The British Pound was among the top performing currencies to finish the week’s trade, as relatively bullish fundamental developments helped push the currency from major bearish sentiment extremes. The highly-anticipated Bank of England monetary policy statement predictably shook FX markets, sending the British Pound immediately higher on unexpectedly limited actions from the central bank. The BoE expanded its Quantitative Easing measures by ₤25 billion to ₤200Bn—normally a bearish fundamental shift. Yet financial markets are all about discounting expectations, and consensus forecasts of a ₤50Bn change meant that the British Pound actually rallied on the news. Whether or not the GBP can continue recent gains may depend on the coming week’s employment numbers, but previously-extreme FX market positioning suggests that risks remain to the topside through the foreseeable future.


FX Options market volatility expectations remain elevated on what promises to be yet another eventful week of price action. Major highlights will likely include a Bank of England Quarterly Inflation Report and UK Jobless Claims Change results—both capable of forcing substantive moves in the British Pound. The recent Bank of England rate announcement underlined market sensitivity to any and all shifts in monetary policy. Fundamental trends have left BoE interest rate expectations in the middle of their 3-month range as markets are unsure of when the British central bank will withdraw its aggressive monetary policy stimuli. Much like interest rate markets we are unsure of what to expect from the often-unpredictable central bank. Yet we would advise that traders pay close attention to the upcoming Quarterly Inflation Report release. Any excessively dovish or hawkish rhetoric could easily force substantial volatility in forecasts and—by extension—the domestic currency.

UK Jobless Claims numbers are similarly difficult to handicap, but fairly bullish market expectations arguably leave the door open for bearish surprises. Current consensus forecasts call for the smallest unemployment gain in since May, 2008—likely a positive result for economic trends. The Bank of England is an inflation-targeting central bank and, as such, does not technically target unemployment rates. Yet one can reasonably be sure that the Unemployment rate is a major factor in the BoE’s decision-making process. If nothing else, any surprises in UK Jobless Claims numbers could force major moves in yield expectations.

The British Pound currently trades at fairly substantial technical resistance against the Euro and US Dollar. We have argued that previous bearish sentiment extremes would lead to a major GBP recovery, and we believe that a further correction in overextended positioning could force major breaks higher for the UK currency.