British Pound Outlook Dominated by Inflation, Retail Sales Data, BoE Chit-Chat

The three big issues that will determine the outlook for the British pound to euro exchange rate and other key GBP pairs in the coming week.

The pound is trading on the back-foot this March with the impressive rally reversing.

Will the remaining events of the month exacerbate the weakness or will it arrest and reverse the new-found trend?

We hear from a number of analysts who tell us what the key drivers for the week ahead are, and how they could impact the British pound.

Rates at Start of the New Week

• The pound to euro exchange rate (GBP-EUR) hit a high of 1.4256 in March before crashing to a low of 1.3710 this week. The pair will enter the new week at 1.3814.  
• The pound to dollar exchange rate (GBP-USD) appears to have actually arrested the downside pressures and is seen at 1.4958.
• The pound to Australian dollar exchange rate (GBP-AUD) is heading towards the lower boundary of its upside channel, for more on this set-up read here. The pair is quoted at 1.9230
• The pound to New Zealand dollar exchange rate (GBP-NZD) has really felt the heat lately breaking below the 2.0 once more. The pair hit 2.0836 in the week beginning 9th March before plumbing 1.9703 in the week beginning 16th March. We enter the new week at 1.9776.

Please note, that all currency quotes mentioned above refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more.

What Does the Outlook Hold?

There are three important issues that will determine whether the current downside action in the British pound will continue.

1) The Bank

Jacqui Douglas, Senior Global Strategist at TD Securities in London tells us that chatter from the Bank of England’s leading decision makers will be important.

We saw just how negative that interest rate cut talk from chief Economist Haldane proved.

Has Haldane started a guerrilla war against the British pound?

“Markets will be watching for other dovish comments from the BoE, and whether the common market view that it will be the next major central bank to hike after the Fed needs to be reconsidered,” says Douglas.

2) Inflation

Watch the inflation data on Tuesday (see calendar).

A pro-GBP outcome would be for inflation to come in stronger than expected.

If it is shown that inflation is actually firmer than forecast then the Bank may have to back off from its newfound interest rate cutting fantasy.

“The stabilisation in oil prices in Feb should slow the downtrend in CPI, at least temporarily, and  we look for just a 0.1ppt fall in the headline inflation rate to 0.2% Y/Y,” says Douglas.

3. Retail Sales

In Thursday we see whether the UK consumer has been splashing the cash.

“The early data points to a slightly below consensus result for February retail sales, as they continue to normalise after extremely strong Q4 growth,” says Douglas.

Markets are looking for sales to come in at +0.4% M/M in Feb after the declines in Jan, but TD Securities see a smaller +0.1% gain on slightly colder than normal weather, and poor sales reports from some large retailers.

With sentiment turning a little negative on the pound sterling as of late we would look for some upside corrective action to take place in the week ahead.

We see the best opportunity for the GBP bulls to come on Tuesday with the release of the inflation data.

We do however caution that downside potential is still expected to run its course, but unless the Bank of England deliver a game-changer the losses will ultimately be shallow.