The GBP/USD pair started off strong this week, pushing above its 200-daily ema and attacked a key pivot at 1.59.

For a look at the technical picture of the GBP/USD see today's technical update: GBP/USD Crosses Above 200-Day SMA and Attacks the 1.59 Pivot

Last week data from the UK was mixed as some better than expected releases on trade, housing and the leading index, were met by another soft employment report and a downgrade of the country's credit rating outlook by Fitch.

width=450The key question going forward with the GBP/USD and also other GBP crosses will be will the Bank of England embark on yet another round of quantitative easing (QE).

The economy continues to show uneven growth, and with George Osborne sticking to his plans for austerity for the country, the only real option for stimulating a flagging economy will be more bond purchases by the BOE.

UK fundamental releases this week will gives us some insight into what the BOE will do next as we get not only the latest BOE Meeting Minutes but also consumer price data. On the macro front, we see the latest annual budget release, as well as February's retail sales reading.

Overall, the picture should show an economy with slow growth prospects and the key for the GBP will depend on the speculation surrounding another burst of money printing by the QE.

Will MPC Meeting Minutes Squash QE Rumors?

The UK economy looks likely to avert a double dip recession as expectations are that the economy has done enough to post a positive print in the 1Q, following a -0.2% growth rate in the 4Q. The BOE's Governor Mervyn King, back on February 29th, said that there are no plans for more QE.

width=342From the Guardian: Taking questions from Commons cross-party Treasury Committee, King said: By and large, I don't think there's any hard and fast expectation that we're inevitably going to do much more.

We will take whatever action we think is appropriate and at that point, expectations will adjust.

His fellow policymaker Martin Weale sent a similar message in a speech on Wednesday. Weale said when predicting the future path of inflation, which some critics say has been pushed up by QE, the price of oil is a particular worry. He also flagged up risks from rising wage pressures once more normal economic conditions return and added that he did not think there was likely to be a further case for QE once the Bank's current programme is complete.

It was only about a week later, on March 8th, that the MPC met and made no change to policy, therefore not releasing any statement. We will therefore be anticipating the Minutes to give us an inside look into the considerations.

In February the BOE extended its QE program by £50 billion bringing it to £350 billion. Below we see the bank's balance sheet prior to the latest announcement, and this latest round of bond buying should be completed by the end of April.

width=400If the Minutes argue that more easing is unlikely, that will have 2 major impacts.

The first is that the GBP should find support on the expectation that the BOE will no longer be making money out of thin air, thereby debasing the currency.

Second, it may cause some angst in financial markets as it is precisely that cheap money which has helped to lubricate the financial system.

Debate about the conditions needed for more QE would serve to undermine the GBP, but may help give UK equities a jolt.

The recent rally in the GBP/USD might indicate that markets are coming to terms with no more QE, and with the Fed also looking less likely to ease, that the currencies may return to more general risk sentiment and fundamental factors to give the GBP/USD direction.

However, the data may not be on the side of the GBP however.

Osborne's Annual Budget To Show No Wavering From Austerity

The first fundamental development that points to continued tough time for the UK economy is the steadfast adherence to austerity measures by George Osborne, as he rebuffs calls to ease his program in order to help stimulate a labor market which continues to reel under tougher austerity measures. He may outline some programs here and there to help ease up lending to small businesses.


Above is a look at the targets of the Osborne plan (in dark blue, ignore the red line), which is to turn around the accumulation of debt by 2014-2015. Therefore, the release of the annual budget shouldn't change the trajectory of the current path of economic growth which will advance in fits and starts as the country digests more austerity.

Inflation Data to Give Scope for BOE to Ease IF It Wanted

The second key release to look out for this week will be in the form of the inflaiton rate, which has fallen sharply over the last 5 months after peaking at 5.2% in September 2011. In January the annual rate stood at 3.6%, and the forecast is that it will fall further to 3.4%.


Falling inflation had been one reason that financial markets still hold out the prospect of more QE by the BOE as lower inflation takes away the key criticism of the bond buying program - that it creates inflation. If the reading comes in stronger than expected it would support the GBP, but if it hits expectations or comes in lower than anticipated, that would likely give the market pause.

At the same time, the BOE Minutes are likely to show the MPC members concerned about future inflation prospects not just what is happening currently, so the MPC report is likely to carry further weight, but the inflation data comes first.

Retail Sales Expected to Show Consumers Retrenching in February

The final key release for the UK, coming out on Thursday will be retail sales, and here the expectation is that the weak economy and the pressures facing households and consumers - soft labor market, flat wages, and still high inflation - will manifest itself with a modest decline in retail sales.

The forecast is that sales drop 0.6%, after a better than expected 0.9% reading in January which itself beat a forecast of a negative reading.


Sales therefore are going to see some payback, which would continue the one step forward, one step back approach in spending that can be seen from the above chart. Taking the last 5 months as a whole though, we can say that the trend has become more positive, and while a setback, a negative reading in February may not be the worst thing. Still, it should bring the focus on the fact that domestic demand remains constrained and that growth will continue to be uneven.

Conclusions: Let's Look to the Data and Minutes for Direction and Clues

This will therefore be a key week for the GBP. While the annual budget release and the retail sales point to uneven growth in the economy, the inflation data should show that the BOE has more scope for QE if it is warranted. Therefore the microscope will fall on the BOE Meeting and what type of discussion there was about expanding the bond buying program even more. The GBP will likely then take its cues from the Minutes. If the BOE holds the door open for more QE, the GBP is likely to be pressured, while if it argues that enough has been done, then we may look for the GBP to be supported. If the deliberation make it conditional on economic outlook, the market's attention will focus on retail sales - which if they show soft consumer spending will likely keep any GBP capped. It's going to be an interesting week.

We will cover these UK releases throughout the week in our daily Market Intelligence Briefings. For information on special subscription rates for FXTimes briefings, click here.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to  FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.