Fundamental Forecast for British Pound: Bearish
The British Pound finished in the middle of the pack this week, as there was little volatility among all of the majors but for the Japanese Yen, while data out of the United Kingdom was mixed enough to keep the Sterling range-bound for the entire week against the Euro and the US Dollar. The EURGBP rallied by +0.31% while the GBPUSD added a mere +0.08%; and while the British Pound was the weakest of the three, it also faced new obstacles that market participants haven’t had priced in. It is for these reasons that we must maintain a bearish forecast for the British Pound, with a small possibility for another middle of the road performance over the coming five days.
If there was ever a swath of data that threw Pound traders for a loop, it was the combined influence of the October consumption, inflation, and labor market data that came out between Tuesday and Thursday. On Tuesday, the October Consumer Price Index showed a yearly rate of +2.7% versus +2.4% y/y expected, while the yearly Core rate was +2.6% versus +2.2% y/y expected. Needless to say, price pressures are much higher than policymakers have indicated over the past several months. The October CPI proved positive for the Pound, but the enthusiasm was quickly dampened.
On Wednesday, the Employment Change on a 3-month basis for the period ending in September came in at +100K versus +135K expected, according to a Bloomberg News survey. Jobless Claims increased by +10.0K in October, well-above the 0.0K reading forecasted. Quizzically, although these other prints were poor, the ILO Unemployment Rate on a 3-month basis for the period ending in September came in at 7.8% versus 7.9% expected and prior. When taken in context of the October CPI print, as well as the October Retail Sales report that came out on Thursday, which showed sales of +1.1% y/y versus +2.1% y/y expected, there is a discouraging direction the British economy is moving in: stagflation.
Stagflation is defined as an economic symptom in which ‘growth rates are low, inflation is high, and unemployment is high.’ Certainly, these conditions are developing: the third quarter quarterly GDP rate was barely +1.0%, predicated around the London Olympics and fewer bank holidays than in the second quarter, both of which assuredly provided a one-off boost to growth; the October CPI showed that inflation rates are running higher than the broad investing public forecast; and the rate at which new jobs are coming to the economy is slowing, despite a lower ILO Unemployment Rate – the rise in October Claims suggests a degree of hopelessness might be setting in (we’ll be watching the Participation Rate as an indicator of organic labor market growth).