Basic Outlook for the British Pound Sterling: Bearish
- Encouraging UK jobs data could boost Bank of England 25 basis point hike next week
- Somewhat hawkish European Central Bank disclosures of a possible 50 basis point rise in September may affect the pound
- UK GDP expected to reveal lower growth for April
UK GDP, Employment Data, Bank of England Interest Rate Decision on the Next Step
British Pound / US Dollar daily chart
Source: TradingView, prepared by Richard Snow
Next week is a week of plenty in terms of the economic calendar when you consider how much impactful US data is worth mentioning within this forecast based on how much the US dollar data has affected recently. This is largely based on the old saying “When the United States catches a cold, the whole world sneezes.”
Better than expected in the United States CPI And consumer confidence data released by the University of Michigan (preliminary), on Friday, threw a turning point in business not only for the Federal Reserve but for other major central banks as well. Ridiculous increases in interest rates have little effect on price increases and consumers have a bleak outlook regarding current and future economic conditions.
Speaking of economic conditions, UK GDP is expected to expand on Monday in April when measured against March, albeit at a slower rate, and is set to show a slower year-over-year rate of expansion, expected to come in at 3.9%, down from 6.4 % when measured compared to April of last year.
On Tuesday, employment data is expected to continue the trend of March job gains with an estimated 106,000 jobs added, bringing the unemployment rate down to 3.6%, likely. A strong job market is a welcome sight for Bank of England (BoE) as it has little choice but to move up to a weaker growth environment.
Bank of England rate decision
Next week, the Bank of England is considering hiking interest rates by 25 basis points despite markets pricing in 32 basis points to tighten. In my view, this could create a scenario where a 25bps hike instead of 50bps could trigger a hawkish disappointment, which could send the Pound down against the Dollar and possibly the Euro. Since US inflation surpassed on Friday, markets are now expecting gains of just under another 225 basis points while markets are expecting just over 170 basis points for the BoE. Interest rate differentials, if market expectations prove correct, could facilitate further depreciation of the pound against the dollar.
Implied basis points Bank of England (left) and Federal Reserve (right)
European Central Bank Sticks to the sequence and forward pre-steering
The euro initially rose against the pound after European Central Bank The decision on Thursday but quickly erased those gains and turned lower in response to ECB President Christine Lagarde’s lack of clarity on the bank’s “anti-retail tool”. A major concern in the eurozone is bond market fragmentation – a situation in which highly indebted member states such as Italy, Spain, Greece and others could see an explosion in sovereign bond yields, disproportionately increasing borrowing costs.
After the meeting, unnamed “sources” revealed that the majority of the Governing Council members were against any mention of the anti-fragmentation tool but that the data was not validated. With that said, the European Central Bank sees fit for a 25 basis point hike in July after asset purchases expire and at least 25 basis points in September, according to worsening inflation data.
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I think the recent rally in the Pound, ahead of Friday’s US CPI data dragged the GBP/USD down, providing a fair amount of room for the pair to trade lower and possibly test an annual low if the UK data or the underlying outlook worsens. After Friday’s move, the yearly decline is not far away now.
Written by Richard Snow for DailyFX.com
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