Is the British Pound Facing the Risk of Stagnation?

Economic data from the United Kingdom showed unexpected signs of a slowdown last week, with weaker-than-expected data reported in trade, production, and house prices and all three purchasing managers’ indexes (or PMI).

Such a distinct slowdown has been interpreted by the markets (BWX) as the beginning of stagflation in the UK economy, which has been suffering from a fragile political situation and a pending separation from the European Union.

The British pound (FXB) retreated from its recent surge to 1.30 against the US dollar (UUP) after policymakers at the Bank of England mentioned the possibility of a rate hike in the near future. The pound (GBB) closed the week at 1.3, a fall of 0.96 against the US dollar (USDU).

The Bank of England cut the UK interest rate to a record low of 0.25% in August 2016 to combat the negative impact of the historic Brexit vote in June 2016. The UK minority government, which recently survived a confidence vote, has initiated Brexit talks, but the process is expected to take a long time.

According to the latest Commitment of Traders (or COT) report on July 7, 2017, currency market speculators have added 11,000 long positions on the pound, but total net positions remain short. 

These data only reflect as late as July 4 of last week, and there may have been some changes after weak economic data were reported later.

Britain’s economic calendar consists of June labor data, average household earnings, and the BRC’s (British Retail Consortium) June report on retail sales. 

Household earnings and retail sales are likely to shed further light on the region’s slowing economic conditions. Further weakness in the data is likely to put pressure on the pound and throw the Bank of England’s hawkish tone into question.