Fundamental Forecast for British Pound: Bearish

Although the Sterling only lost a mere 0.2 percent on the week against its American counterpart, notably ending the week mixed against the major currencies, much of the sentiment surrounding the British currency continues to be negative. Data out of the United Kingdom the past week was exceptionally bleak, with industrial production and manufacturing data from April falling short of expectations, and consumer prices and producer prices data showing that inflation remains a significant concern for the economy. For the latter, although the producer price figure fell short of the survey figure, a 4.5 percent year-over-year rate for the consumer price index, coupled with weak components of growth, further suggest that the British economy’s recovery is struggling at best.

While the flow of significant data is much lighter this week for the European nation, it is unlikely that Sterling will find much relief in a market already on edge, shifting towards further risk-aversion as the debt situation in nearby Greece reaches its crescendo. The British housing market, one of the major sectors continuing to weigh on the recovery in the United Kingdom, has data due out Sunday, with the Rightmove house prices report due. The index has not expanded by more than 0.9 percent since November 2010, and is unlikely to reach said level of growth again as housing prices expanded by a soft 0.7 percent in May. The extended period of low rates could have some empirical evidence to suggest that liquidity has started to flow to consumers once more, with public finances data due at the start of the European session on Tuesday.

The most important event for the United Kingdom this week though is the release of the Bank of England minutes from their most recent meeting last Thursday. The Bank of England kept their rates on hold, as expected, at 0.50 percent on Thursday, despite the continued build-up of price pressures in the British economy. With ultra-hawk Andrew Sentence off of the Monetary Policy Committee, it will be interesting to see how the dynamic has shifted in favor of the doves, and how this will affect future rate decisions amid an economy closely resembling a stagflationary state.

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