Fundamental Forecast for British Pound: Bearish

While the Sterling depreciated 0.51 percent against the U.S. dollar over the course of the week, the end result was less of a function of Sterling weakness or U.S. dollar strength, but rather a global shift away from risk; as such, the Sterling was down against the three funding and safe haven currencies, the Japanese Yen, the Swiss Franc, and the U.S. Dollar. Also, the growth outlook for the British economy has shifted lower following continued weak housing data, which showed that house prices fell by 1.2 percent on a year-over-year basis in May. Similarly, on Wednesday, weak purchasing managers’ index of manufacturing data showed that the rate of expansion slowed, suggesting that as inventories build, consumers are spending less, making the horizon for the British economy less bright over the coming months. Overall, the Sterling declined across the other seven major currencies over the course of the week.

The week ahead is unlikely to inspire renewed optimism in the British economy, and thus the Pound, either. While the trade balance is forecasted to have improved in April, it comes after the Pound depreciated against its major European trading partners, the Euro-zone and Switzerland. The trade balance data will be overshadowed on Thursday, though, by the Bank of England rate decision. Rates are widely expected to be on hold at 0.50 percent, with the Overnight Index Swaps showing a near non-existent 1.0 percent chance that the Monetary Policy Committee votes to hike rates at the meeting. The interest rate outlook is dimming as well, with the OIS showing that markets are pricing in a 31.8-basis pointsover the next 12-months. The OECD recently called for the Bank of England to raise rates due to rising inflationary pressures, with the CPI for March having increased by 4.0 percent, yet, policymakers appear unwilling to raise rates as long as growth remains muted, at 0.5 percent in the first quarter.

Producer prices on Friday will likely show further price pressures, and while the Bank of England remains aware of said pressures, the commentary following the decision will likely indicate that rates will be on hold for some time. Even though the rate decision has the ability to spark immense volatility in favor of the Pound, given the poor growth figures that suggest further weakness for the remainder of the year, Sterling-based crosses this week could depreciate further in the coming week. The Pound remains particularly vulnerable to the funding currencies, considering the shift to risk-aversion since Wednesday. The first full week of June is primed to be rough week for the Pound, from a fundamental perspective.

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