British Pound to Fall as Data Signals Deepening Recession

Written by Ilya Spivak, Currency Analyst

The British Pound faces substantial downside risks next week as a heavy dollop of negative economic data points to ever-deepening recession.

Fundamental Outlook for British Pound: Bearish

- UK Jobless Claims Rise by Most on Record
- Bank of England Unanimous On Quantitative Easing
- UK House Prices Fall at Record Pace for Second Month in March

The British Pound faces substantial downside risks next week as a heavy dollop of negative economic data points to ever-deepening recession. Last week, we saw sterling come under substantial selling pressure after Jobless Claims jumped much more than expected and the Claimant Count ticked to 4.3% (versus forecasts of 4.0%) in February. Next week’s Retail Sales is very much a part of the same picture: as companies trim jobs, disposable incomes dwindle and consumer spending falters. Expectations call for receipts to add 2.5% in the year to February, down from 3.6% in the preceding month. Private consumption is the largest component of overall economic growth, so weakness here bodes ill for Britain’s ability to climb out of the current downturn. Indeed, the IMF has predicted that this time around the UK will see the worst recession among the G7 nations.

Anemic economic growth is set to bring inflation lower, with growth in consumer prices expected to slow to just 2.6% in the year to February, the lowest in 11 months. Minutes from the last meeting of the Bank of England revealed that policymakers voted unanimously to cut interest rates by 50 basis points and begin quantitative easing, committing to spend 75 billion pounds to buy government bonds fearing that price growth may slip well below the 2% target rate this year. The week aptly closes with the release of the final revision of fourth-quarter GDP figures, with that release set to confirm that the economy shred a whopping 1.5% in the three months to December 2008, the worst in nearly three decades.

The US Dollar Index is showing signs of bouncing higher having found support at a rising trend line established from the lows set last July, hinting that feverish selling of the greenback may have run its course and will not be propping up GBPUSD for much longer. This opens the door for sterling to bear the full brunt of rapidly deteriorating data, suggesting the bears will be out in force in the near-term.