British Pound to Follow Stocks Lower on Renewed Risk Aversion

Fundamental Forecast for British Pound: Bearish

• UK House Prices See First Drop in a Year, Retail Sales Disappoint
• Bank of England Cuts Economic Outlook, Jobless Claims Underperform
• British Pound Sellers Take Over on Failure at 1.60 vs US Dollar
• Speculative Sentiment Points to British Pound Weakness Ahead

The British Pound has notably re-coupled with overall risk sentiment, showing a correlation reading of 0.78 with the MSCI World Stock Index on 20-day percent change studies. This hints that the path of least resistance points lower after stocks reversed sharply lower having tested May’s swing top to post the worst weekly performance in over three months. A return to risk aversion seems reasonable considering most of the engines of the global economic recovery are meaningfully faltering. Indeed, European growth is likely to remain lackluster as the region tries to trim its sovereign debt burden, Japan remains in deflation, China is willfully pulling on the brakes amid fears of overheating, and the US has notably lost pace.With that being said, risky assets seem to be scope for a corrective rebound in the near term given the pace of last week’s selloff as well as expectations of some encouraging results on second-tier US economic indicators. Producer Prices are set to rise for the first time in four months, Industrial Production is expected to pick up momentum, and Housing Starts are set to snap a two-month losing streak in July. Traders have long looked to the health of the world’s largest consumer market as a proxy for the global recovery at large, and while these results are unlikely to prove sufficient to stop risk aversion in its tracks, they could certainly engineer an upward retracement across global stock exchanges that pulls the British Pound along for the ride.

The domestic economic calendar lacks significant market-moving potential. The release of minutes from the Bank of England’s August monetary policy meeting headlines the docket, but traders are unlikely to see anything that has not been priced in already after last week’s publication of the quarterly inflation report. The same goes for July’s Consumer Price Index figures, with the third consecutive decline in the annual inflation rate only serving to reinforce the central bank’s well-publicized sanguine view on near-term price growth. July’s Retail Sales report rounds out scheduled event risk, with core receipts set to rise 1.8 percent from the previous year to register the smallest annual increase in three months.