Fundamental Outlook for British Pound: Bearish

- UK Jobless Claims results far better than analysts’ forecasts
- Higher-than-expected CPI results likewise bolster outlook for GBP yields
- GBPUSD Technical Forecast shows clear risk of reversal

The British Pound finished the week marginally higher against the US dollar, but the GBP/USD’s inability to cross above range highs leaves the pair at clear risk for noteworthy reversal. Fundamental data proved largely better than expected and generally bolstered economic outlook. Officials announced that UK Jobless Claims gained “only” 39.3K in the month of May—far better than expectations of a 60.0K gain. Yet the slowdown in job losses hardly signals that the sharp domestic recession is over, and virtually no one expects growth to turn positive through the foreseeable future. Fundamental outlook for the British Pound remains somewhat bearish, and a relatively empty economic calendar is unlikely to force shifts in economic sentiment. It will be instead more important to monitor general trends in risk sentiment and effects on the British Pound and key counterparts.

The correlation between the British pound/US dollar pair and major global equity indices has pulled back to recent trade, but we expect that said link would greatly strengthen on any signs of financial market duress. Our Senior Strategist predicts that the US S&P 500 topped at its very recent high, and a late-week reversal in the index adds credence to such predictions. Other important risk barometers are showing noteworthy signs of stress: the spread between US Treasuries and highly-speculative junk bonds has recently increased after several months of contraction. Though these two examples hardly tell the entire story, there is a general sense of unease across financial markets and optimism is waning. A true turn in the tide would likely be enough to sink the British pound and other key currencies against the safe-haven US dollar.

The UK economic calendar remains almost exactly empty for the week ahead, and we expect little event-driven volatility for most major currencies. It may be important to watch for any especially noteworthy shifts from the US Federal Reserve. The decision-making Federal Open Market Committee is expected to commit to historically low interest rates through the coming year—quashing speculation over potential Fed rate increases. Their words could influence global equity indices and, by extension, the British pound/US dollar currency pair.

David Rodriguez is a Currency Analyst at FXCM.