British Pound Outperformance at Risk on GDP Growth Results

Fundamental Forecast for British Pound: Bullish

-    UK budget woes send British Pound lower
-    British Pound nonetheless outperforms and receives bullish SSI forecast
-    UK Gross Domestic Product data likely to move markets in week ahead

The British Pound survived a week of sharp US Dollar and Japanese Yen, outperforming major rivals despite mixed economic data. An early-week upward surprise in December Consumer Price Index numbers likely helped, moving forward timetables for Bank of England interest rate hikes. Indeed, year-over-year CPI inflation rates unexpectedly reached 2.9 percent; at rates above 3.0 percent, the governor of the Bank of England must write a letter to the Chancellor of the Exchequer to explain why prices have gained so rapidly. Formalities aside, buoyant inflation rates present a fairly important challenge to the BoE and Overnight Index Swaps jumped in expectations of higher interest rates. Late-week Retail Sales data brought said OIS forecasts back to pre-CPI levels, however, and it will be critical to watch data in the week ahead to gauge likely direction in UK interest rates and the domestic currency.

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Levels that keep the US dollar rally underway are well defined.  The commodity currency declines (AUD, NZD, CAD) are accelerating and the decline is just beginning.

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Important lows may be in place for the Euro crosses.  The Yen crosses will likely continue lower, at least in the near term.

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•    Canadian Dollar Mostly Stronger as Canadian GDP Rises for Third Month
•    Australian Dollar Down with Commodities - RBA Expected to Raise Rates Next Week
•    British Pound Down Despite Jump in UK House Prices - BOE May End Quantitative Easing
•    Euro Mixed as Euro-zone CPI Rises Less Than Expected, Unemployment Climbs

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The Bank of Japan left their benchmark rate on hold this week at 0.1% as deflationary pressures persist. The central bank pledged last month to keep inflation above zero which would require leaving interest rates on hold for the foreseeable future.

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US Dollar Forecast to Appreciate versus Euro Ahead of NFPs Data

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Considering the significant reversal in underlying risk trends over the past few weeks, GBPCHF marks a striking case. Historically, the pound has held the roll of a high-yielding carry currency and the franc has played its part as a straight forward funding and risk-aversion currency. Yet, with the most recent reversal in investor sentiment, we have seen these rolls diminish (if not reverse).

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Manufacturing activity in the U.S. is expected to expand at a slower pace in December, with economists forecasting the ISM index to weaken to 55.2 from 55.9 in the previous month, and the data is likely to spark increased volatility in the exchange rate as investors weigh the prospects for a sustainable recovery.

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The Canadian economy grew 0.4% in November following a 0.2% rise the month prior led by a 2.4% improvement in wholesale trade. A stronger than expected Canadian labor market-forecasted to have added 15,000 jobs in December- is helping to fuel consumer demand.

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The surprisingly strong advance Q4 GDP data and better-than-expected confidence and regional PMI data added to early stock gains that were already being fueled by multiple strong earnings reports in the technology sector. If the final GDP reading comes in…
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