British Pound Under Pressure As Inflation Begins To Bite Consumers

Fundamental Forecast for GBP/USD: Bearish

- Evidence piling up that Brexit concerns starting to impact economy, thanks to the weak British Pound.

– Up ahead, the Brexit bill will be making its way through Parliament; the path to triggering Article 50 by the end of March looks clear.

- Crowd positioning in GBP/USD remains very bullish, a contrarian signal for further losses.

The past week was a sorry one for Sterling bulls. A host of data has failed to inspire, and the British Pound ended the week down against both the US Dollar and the Euro after failing to capitalize on the political woes facing both the Greenback and the European single currency. A review of the last week is necessary to express how the fundamental backdrop for the Sterling has deteriorated.

First up, last Monday there were signs that consumer spending is slowing. Credit card spending in the UK in January grew at one of the slowest annual rates of the past three years, according to data from Visa, rising 0.4% year-on-year, down from 2.5% in December. On the month, consumer spending climbed 0.5% after a 2.5% drop in December. But the data ties in with other signs that Brits are reigning in their spending. The British Retail Consortium reported last week that spending in the November-January festive period rose by the smallest amount since the financial crisis, while the Confederation of British Industry said its January retail gauge dropped by the most since records began in 1983.

The Pound was under more pressure on Tuesday after the latest UK inflation print failed to meet analysts’ expectations. CPI rose +1.8% year-on-year in January, missing expectations of a rise to +1.9%, while core inflation remained unchanged at +1.6%, against expectations of +1.7%.

The following day the UK employment report for the fourth quarter received a lukewarm reception from financial markets. Wage inflation missed expectations, rising just 2.6% year-on-year (both including and excluding bonus payments). While the unemployment rate remained unchanged at 4.8% for the October to December period, the single month rate fell to 4.6% in December, from 4.9% in November – within touching distance of the latest downward revision to the Bank of England’s estimate for the equilibrium level.