Fundamental Forecast for British Pound: Bearish

Friday’s dismal US non-farm payroll report upset even the most modest estimates with a print of just 18K for the month of June, marking a nine-month low and grossly missing estimates calling for a read of 105K. Coupled with a downward revision of last month’s subpar print, the data suggests that the employment sector continues to lag rekindling concerns over future growth prospects for the world’s largest economy.

The sterling surged on the print as investors sought haven in fixed-assets, with Gild yields falling to their lowest level this month as prices surged. The 0.47% advance in the pound pared nearly all the losses seen earlier in the week after the BoE left interest rates unchanged at 0.50%.Accordingly the sterling closed out the week off just 0.16% against the greenback. Weaker US growth suggests that the Fed’s accommodative monetary policy will remain in place for some time, keeping interest rates expectations subdued. The pound climbed as lower interest rate prospects and concerns about domestic growth in the US had investors looking for alternative ‘haven’ plays. However the gains may be limited ahead of key data next week on the economic docket.

Event risk next week for the pound is highlighted by the June CPI and RPI figures on Tuesday followed by a batch of key employment data on Wednesday. Consensus estimates call for a CPI to remain unchanged at 0.2%m/m and 4.5% y/y. With the MPC’s target for inflation at 2%, a stronger than expected print could spark volatility on sterling crosses as interest rate expectations climb. Employment data will be closely eyed as concerns that the UK recovery may be faltering continue to take root. Jobless claims are seen printing at 15.0K in June, down from the previous months read of 19.6K, with the ILO unemployment rate expected to hold at 7.7%. The data would mark the 4th consecutive month claims have risen since February when claims contracted by 8.5K.

With UK inflation more than double the targeted rate, traders will be paying close attention to wages as fast growth in payrolls is likely to accelerate rising prices. Average weekly earnings are expected to rise by 2.1% y/y, up from the previous read of 1.8%, and with economic data continuing to suggest a fragile recovery the BoE will remain reluctant to move on interest rates despite rising inflationary pressures. Subsequently, the interest rate expectations are likely to remain firm with Credit Suisse overnight swaps factoring in only 20basis points in hikes for the next twelve months.Traders will also be eagerly anticipating the BoE minutes which are scheduled to be released on July 20th for further clues as to the central bank’s outlook for the domestic economy.

The pound rebounded off of trendline support dating back to July 2010 before encountering resistance at the convergence of trendline support dating back to June 22nd High and the 61.8% short-term Fibonacci extension taken from June 28th trough and the lows tested on Friday, at 1.6075. The sterling is likely to maintain its recent range ahead of next week’s economic docket, with our bias remaining to the downside. Nonetheless, we note that a topside break of the extension eyes targets at the 1.61-handle, backed by 1.6140 and the 100% extension at 1.6160. Interim support rests at 38.2% Fib extension at 1.6020 with subsequent floors seen at the 1.60-figure, 1.5940, and 1.5920.

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