The British Pound Faces Fresh 2016 Lows Against Euro, Dollar as Inflation and Employment Data Dominate the Outlook

Inflation data and the Pound

Inflation, employment and earnings data could just help the GBP avoid fresh 2016 lows against the USD and EUR in the week ahead.

  • Pound to Euro exchange rate today: 1.1563 - markets closed. Previous 2016 daily low = 1.1585
  • Pound to Dollar exchange rate today: 1.2919 - markets closed. Previous 2016 low = 1.2799

GBP recorded a fresh 2016 low against the Euro on the final day of the week ending 12th August.

It was a poor week for Sterling with the currency being the worst performer amongst the world's top ten currencies.

The Pound has fallen nearly 13% against the Dollar since the UK referendum on EU membership and is the worst-performing major currency (in both developed AND emerging markets!) for the period since June 23rd, by a notable margin.

Momentum is clearly pitted against Sterling, but it must be noted the pace of decline has slowed.

Whether or not the move lower continues will be revealed on Tuesday the 16th August when we get both inflation and employment data for the month of July.

The data will offer a good look at how the economy responded to the Brexit vote, and those hoping for a stronger Pound will be holding thumbs for better-than-forecast numbers.

Consensus estimates for inflation anticipate a reading of 0.5% being delivered, while the average earnings figure in the employment report see consensus expectations for growth of 2.4%.

“CPI inflation should hold steady in July, as the fall in core inflation offsets a rise in food and fuel prices. But it’s unlikely to remain subdued for long,” says a preview note from Capital Economics.

Capital Economics forecast inflation to climb this year, as Sterling’s slide since the referendum pushes import prices up and as the effect of low energy and food inflation wanes.

We must also be aware of the ever-rising competition in the supermarket sector and lower consumer energy prices which may also spring a downside surprise, which could hurt the Pound.

"We see downside risks to the Bank of England’s recent forecast and consensus," say TD Securities in a brief to clients. "Core inflation should decelerate slightly. Soft prices in the near-term (before FX pass-through kicks in) should give the BoE ample room to continue easing rates later this year."

Regarding the employment situation, Capital Economics reflect that Labour market appeared resilient before the referendum.

“But the vote to leave means that wage growth will be contained and unemployment will rise in coming months,” say Capital Economics.

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How Low Can the Pound Go?

According to the latest data from the CFTC investors have added to their hefty bets against the Pound.

Short positions are now shown to be at a record level having been building for six consecutive weeks now.

The net short GBP position stands at a notable $7.3BN, sellers now outnumber buyers by a ratio of 3.5:1.

Committment of traders report

With the GBP/USD teetering above 2016 lows at 1.30, and the GBP/EUR now below 1.16, it is clear we are on the cusp of a big move lower should these levels break.

Technical support levels, such as 1.30 and 1.16, often slow declines owing to the heavy supportive buying interest - many in the market will be buying weakness into these levels to profit on any bounces.

However, should the support break, then the market could turn one-directional again and bet that the declines will accelerate. It is something of a self-fulfilling prophecy.

The question therefore is just how far can the Pound fall until it becomes grossly undervalued?

“The GBP tumbled in the wake of the referendum and we reduced our year-end target for GBPUSD as a consequence (to USD1.25). The GBP adjustment has been severe already but we think there is a little more weakness ahead of the pound,” says Eric Theoret, FX Strategist at Scotiabank.

Scotiabank’s forecast is a little below the market consensus for year-end (1.30) but they note that forecasters continue to adjust expectations and the consensus has shifted 2 cents lower since the start of August alone.

Uncertainty Cleared as Hammond Commits to Plug EU Subsidy Shortfall for Farms, Research Spending, Infrastructure

A big positive for Sterling on Saturday as the UK's Chancellor of the Exchequer, Philip Hammond, announced the government would cover any EU spending on agriculture and university research.

Other EU-sponsored infrastructure projects will also see their existing EU committments guaranteed.

The cost to the taxpayer should amount to £4.5BN. The government's funding commitment is valid through to 2020, from where fresh policies will be developed.

The move is a positive, in our view, for the GBP in that another layer of uncertainty stemming from the EU referendum outcome has been wiped away.

Remember, the reason Sterling, and the economy, have suffered following the vote is primarily because of the uncertainty that the outcome generated.

Only once that uncertainty is removed entirely will UK businesses be able to make confident, and informed, investment decisions about the future.


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