Fundamental Forecast for British Pound: Bearish

- U.K. Trade Deficit For May Grew Less Than Expected to 16 Billion Pounds
- Consumer Prices in May Slowed to 3.4% from 3.7%
- The U.K. Unemployment Rate Unexpectedly Fell to 4.6% from 4.7% in May

Indeed, the labor picture brightened as the number of jobless claims fell by 30,900 beating forecasts of 20,000 and lowering the unemployment rate to 4.6% from 4.7%. A decrease in the number of Britons out of work helped generate a 0.5% increase in retail sales with household goods purchases improving by 0.8%. Despite the increase in demand, consumer prices grew less than expected during May as energy prices have fallen. Inflation accelerated by 0.2% against forecasts of 0.4% which led to the annualized rate slowing to 3.4% from 3.7%. Price growth remains above the government’s 3.0% threshold but is showing signs of falling back toward their 2.0% target level as policy makers have predicted. An increase in mortgage approvals in May to 51,000 from 48,000 the month prior ads to the case for the BoE to bring an end to their asset purchase program.

The central bank is waiting for next week’s budget release before it sets medium term monetary policy targets. Governor King in recent comments stated that when policy makers are willing to act, it "is most likely to be through a rise in bank rate with asset sales being conducted later in an orderly program over a period of time, leaving Bank Rate as the active instrument." Therefore, tightening could become sooner than expected but remains in the distance given the concerns over the impact of the issues in Europe.

The upcoming BoE minutes will provide some insight into policy makers thought process but may lose their value considering that the budget release could significantly alter their thinking. A more important event will be the release of the newly formed Office of Budget Responsibility first growth and borrowing predictions. The OBR is the centerpiece fiscal reform of Prime Minister David Cameron's month-old government, which has made tackling the GBP156 billion budget deficit its top domestic policy goal. If spending forecasts and austerity measures are deemed too sever, we could see the pound come under pressure on dimming growth outlooks. However, a well received plan of action to put the U.K. on solid fiscal ground will ease credit rating concerns and may be generate sterling support.

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