Fundamental Forecast for British Pound: Bearish

The British pound found strong support in the latter half of the week, after declining immensely on Monday, and nearly dropping another 200-pips on Tuesday, on a worse-than-expected price data print which indicated that inflationary pressures were easing. Similarly, in line with the Bank of England’s consensus that it would leave rates on hold for an extended period in order to boost economic growth, rate hike expectations fell sharply, suggesting that, on pure interest rate differentials, the Sterling could come under heavy pressure in the coming weeks.

Although the Sterling’s performance this past week against the U.S. Dollar was strong, underlying economic conditions, as indicated by other reports issued over the week, showed that everything is not as sanguine as it might appear. Indeed, price softened across the board in June, with the core producer price index reading down to 3.2 percent from 3.4 percent in May, on a yearly-basis, while the retail price index fell to 5.0 percent, short of the 5.2 percent expectation, in May, on a yearly-basis, as well. The housing sector and labor market also showed signs of fragility, with the DCLG reading of United Kingdom House Prices contracting by 1.6 percent in May, and the ILO unemployment rate holding at 7.7 percent in May on the heels of 24.5K additional jobless claims being filed in June.

The third week of July is relatively light on data, considering it comes after a week denoted by unemployment and price data, and ahead of the advance second quarter gross domestic reading in the last week of July. Nonetheless, two events on the docket that are considered significant will spark volatility among Sterling-based pairs. The Bank of England minutes from their most recent Monetary Policy Committee are due on Wednesday, which could be markedly different from prior notes, as stringent inflation-hawk Andrew Sentance was off of the MPC for the first time this year. Accordingly, with a decreasing pace of inflation, the minutes could be particularly dovish, which would cause the Sterling to depreciate across the board.

The last data release of the week, and the other release worth mentioning, is the retail sales report for June. Consumer spending is projected to have increased in the last month of the first half of the year, with retail sales forecasted to have increased by 0.7 percent on a month-over-month basis, and 0.7 percent on a yearly-basis, in June. Regardless, consumer spending will have to increase for several consecutive months in order for the Bank of England to change their continuous dovish stance going forward.

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