Fundamental Forecast for British Pound: Bearish

The British pound traded sideways over the course of the last week of June against the major currencies, though pushed higher against the three safe haven currencies, the Swiss Franc, the Japanese Yen and the U.S. Dollar, up 2.44 percent, 1.21 percent, and 0.72 percent, respectively. The appreciation against the low-yielding currencies comes not as a function of British Pound strength, but rather of a global shift to risk-appetite as the markets breathed a sigh of relief as the Greek parliament passed the necessary medium-term austerity measures to ensure the fifth tranche from the European Troika that would shore up its liquidity and solvency problems.

In fact, data out of Britain was disappointing this past week, which exposes further weakness in the Sterling going forward. Final gross domestic product figures from the first quarter showed that the economy had grown less-than-forecast, up 1.6 percent year-over-year, below the 1.8 percent original reading. Similarly, total business investment declined in the first quarter, down 3.2 percent from the fourth quarter. Despite this, the Sterling found support, as noted before, on a global shift to risk-appetite.

The week ahead is also primed to show further weakness in the British economy. The housing market is expected to have continued to have suffered in June, with PMI construction data forecasted to have shown a slower rate of expansion, down from 54.0 in May to 53.8 in June. The PMI services data is expected to show a similar deterioration in June, down to 53.5 from 53.8 May.

The most important data of the week, however, comes out on Thursday. At 08:30 GMT, industrial production data for May will be released, which is expected to show a 1.1 percent increase from April; nonetheless, production is forecasted to have remained down from the year prior, with a 0.5 percent contraction on a year-over-year basis. Manufacturing data, on the other hand, paints a more bullish picture for the Sterling, with a 2.1 percent forecasted increase in May on a yearly basis.

Yet, while the manufacturing data could prove bullish for the Sterling, the data that the markets are eyeing is the rate decision by the Bank of England, which will be released at 07:00 GMT. The Bank of England is expected to maintain its official rate at 0.50 percent, while simultaneously holding its asset reserve purchase program at £200 billion. This comes despite the country is facing an inflation rate of 4.5 percent, more than double its target of 2 percent. Traditionally, an inflation rate of this level would be a signal for the MPC to increase the bank rate, but policy makers believe that inflationary pressures “will ease once food and oil prices come down.” On June 9, the MPC voted to maintain the official Bank Rate at 50-basis points, leaving it unchanged for eleven consecutive quarters, and the rate is expected to remain unchanged, with only a 3.0 percent chance of a 25.0-basis point rate hike. Further dovish tones by the Bank of England only further weigh on the British Pound going forward.

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