Fundamental Forecast for GBP/USD: Bearish

– The British Pound was one of the weaker currencies last week, hurt by weaker PMI and trade data.

– The retail crowd remains net-short GBP/USD, but short positioning has shrunk significantly over the past week suggesting a turn may be nearing.

The British Pound was one of the weaker performers in the FX space last week, losing ground to five of the seven major currencies as the calendar turned into the second half of the year. GBP/CAD was the worst performing GBP-cross, losing -1.74%, while GBP/JPY was the best performing GBP-cross, gaining +0.31%. With a lighter economic docket in the days ahead, focus will likely remain on the reemergence of weak economic data that emerged last week.

Despite the recent turn in rhetoric from Bank of England policy officials at the end of June, the overbearing trend of weakness among major data releases in the past few days has soured the mood around the British Pound. PMI figures for June missed to the downside suggesting a slower rate of GDP growth than previously expected. Likewise, industrial and manufacturing production figures for May, in conjunction with a deterioration in the trade balance for May, provided “hard data” to back-up the deterioration in the “soft data” PMI figures. As a result, the UK Citi Economic Surprise Index, which measures economic data momentum for the UK economy, fell to -35.1 by July 7, its lowest level of 2017 and lowest overall since June 2016.

While BOE officials had previously boosted the British Pound thanks to hawkish rhetoric, their concerns look hollow in context of recent trends, which may be why the perceived hawkish stance hasn’t translated into a more sturdy rally. Bond markets have responded, even if currencies haven’t. Since June 14, the 2-year UK Gilt yield has increased by 24.3-bps to 0.334% and the 10-year UK Gilt yield has increased by 37.8-bps to 1.305%; on balance, the 2s10s Gilt spread is up by 13.5-bps to 97.1-bps overall.