The UK manufacturing PMI posted a reading of 52.1 in January, much better than the forecast of an increase to 50.2 from 49.6 in December. Today’s data makes it more likely that the BOE will not take the most aggressive approach, and while we anticipate more QE, the amount announced may be smaller than what we saw back in October, which should be supportive of the GBP.

This week, 3 fundamental releases will give us a good idea of the UK’s economic performance in January, as we look at the latest manufacturing, services, and construction PMI’s. These releases can either improve the GBP’s fortune as recent week have seen rising unemployment and a contraction in growth for the 4th quarter. A string of positive releases – and the most timely ones – will be important to the outlook and prospect for the Bank of England.

With the possibility of a shallow recession on hand the Bank of England may feel pressed to expand its purchase of bonds in its quantitative easing program. Market participants’ expectation is that the BOE will in fact increase the scope of its bond buying program, the main question then is by how much. The drop in GDP growth could reinforce those on the BOE that want more stimulus and that could mean that the recent rally in that GBP/USD may find some fundamental factors for a retracement.

This week will be a key one for GBP as we have 2 very important fundamental risk events – the Bank of England meeting minutes as well as the advanced version of 4th quarter GDP. These two reports will likely determine the direction of the GBP for the next few weeks – until we get the BOE rate decision in early February.

The claimant count change – the number of Britons claiming unemployment benefits after losing their jobs – is expected to rise by 7.0K in December, following a 3.0K climb in November. That would tell us that the labor market situation in the UK continues to show deterioration. A weaker than expected employment report can put pressure on the GBP and cause the GBP/USD to retest its lows from Monday (1.5285) and then the lows from Friday (1.5234)

In the upcoming European trading session the UK will release its latest reading on consumer inflation. This an important release as it should further the theme that inflation is easing in the UK which lowers the threshold for the Bank of England to conduct further monetary easing via its bond purchase program.

Yesterday, I argued that the UK’s credit rating will be a major factor for the GBP/USD, with Moody’s suggesting the loss of its AAA status would be a possibility if the economy faces another shock. The data to monitor will be the continuing debt profile of the UK and today we saw the credit account deficit hit a record high. That plays into our assumptions that the GBP/USD will fall, and in the short-term timeframe we see the GBP/USD creating a possible head-and-shoulders pattern.