Keep An Eye On Pound/USD This Week

A continuous string of bad economic data from the UK has impeded the Bank of England’s shift towards a more hawkish monetary policy path, which has weighed down the Pound recently.

Following May’s ambiguous election results, business and consumer confidence has sagged, as it has become unclear what type of deal the government will be able to negotiate with the EU.

PMI services data for June came in at 53.4, as opposed to the expected 53.5, which is a notable drop from the 53.8 level of May. This signals a slowdown of growth in UK’s services sector.

Adding to the negative sentiment was Deloitte’s Chief Financial Officers survey results, which showed that 72 percent expected a worsening business environment in the UK once they officially leave the EU. Company executives are growing increasingly worried about how accessible EU’s markets and labor skills will be to them after Brexit.

On the consumer side, data from Visa Inc V showed that consumer spending declined in June. Whilst the election result has been one factor deterring consumer confidence, UK households are also facing rising inflation, which has been aggravated by an income squeeze, as a supposedly tighter labour market has failed to fuel corresponding wage growth.

Hence the Bank of England is now battling with declining business investments and lackluster wage growth on the one hand, and rising inflation on the other. This dilemma resulted in only three policymakers voting to raise interest rates at the last meeting, whilst the other five remained dovish due to the cloudy economic picture.

Nevertheless, the upcoming labor market data to be released on Wednesday should provide more clarity as to what the bank’s approach to monetary policy will be going into the next meeting.

The Pound has weakened recently following unimpressive economic data releases, trading at 1.28 against the USD on July 10th. If wage growth data disappoints on Wednesday, we could see the Pound decline further. However, positive data could potentially put a rate hike back on the table at the next rate setting meeting, which could send the Pound rallying off recent lows, creating a lucrative long trade opportunity.

Over the medium to long-term outlook, however, the Pound will remain weaker against the USD, as monetary policy paths diverge. The Federal Reserve has already hiked rates four times since 2015 to mark the end of its extremely accommodative policies, and recent meeting minutes releases have also revealed a willingness to start unwinding the Fed’s balance sheets by selling off their holdings of mortgage-backed securities. Interest rates in the UK are likely to stay comparatively lower, as the Central Bank is forced to take a more cautious approach following the Brexit and election aftermath.

So while the Pound could potentially rally based on wage growth data this week, the general outlook still remains weak.