16.07.202500:02 Forex Analysis & Reviews: Pressure on the Pound Is Mounting

Incoming macroeconomic data from the UK appears distinctly weak. GDP unexpectedly declined by 0.1% in May instead of the forecasted 0.1% growth. The trade balance deficit exceeded expectations, industrial production fell by 0.9% month-over-month and 0.3% year-over-year, and NIESR lowered its three-month GDP forecast from 0.4% to 0.2%.

NIESR also revised its annual GDP growth forecast to 1.2% and expects average annual inflation to be 3.3%. Considering that the average inflation rate over the first five months of the year was 3.1%, this signals not stabilization or a decline in prices, but further price increases. At the same time, NIESR forecasts two Bank of England rate cuts by the end of the year, implying the Bank will cut rates even amid rising inflation. When has such a thing been possible? Most likely, this is merely an attempt to manipulate markets to create the impression that the situation is under control.

Another worrying sign is the forecast that the government will fail to comply with its fiscal rule, as deteriorating economic prospects and declining projected tax revenues will necessitate tax hikes in the autumn budget. Higher corporate taxes will shift the burden to end consumers, which is a pro-inflationary factor. This, in turn, will prevent inflation from declining in a slowing economy. What does this amount to? The same threat of stagflation has recently been discussed in the context of the U.S. economy.

And all of this is occurring in a trade war environment, from which the UK is exempt, having struck a deal with the U.S. early on.

The pound may experience heightened volatility toward the end of the week, as June's inflation report is due Wednesday and may show a stronger-than-expected price increase, followed by Thursday's labor market report, where—aside from the unemployment rate—wage growth dynamics will be particularly important.

Net long positions on GBP slightly increased during the reporting week to 2.82 billion. Speculative positioning remains in favor of the pound, yet it offers no support—the fair value has dropped below its long-term average and shows a tendency to decline further.

In the previous report, we suggested that the chances of a GBP/USD rebound had diminished and that the most likely scenario was a continuation of the downward move. The pound met these expectations, reaching 1.3417, and as of today, there are no signs of a return to the bullish trend. We expect a further decline to 1.3310/40, followed by a drop to 1.3140/50. The resistance zone will restrain growth at 1.3600/30.