Fundamental Forecast for British Pound: Bearish

• British Pound tumbles towards January low on disappointments in manufacturing
• Our retail sentiment indicator suggests GBPUSD could fall further
• Japanese Yen stands to strengthen further versus British Pound

The British Pound tumbled near year-to-date lows and took the dubious honor of worst-performing major currency on the week, falling almost four percent against the surging Japanese Yen. Disappointing UK PMI Manufacturing survey numbers capped a difficult week for the British Pound, and indeed the stage is set for further declines into an important week ahead.

The first week of a new month quite often sets the pace through the end of the calendar, and a highly-anticipated Bank of England rate announcement suggests that much will depend on the central bank through June. Overnight Index Swaps show interest rate traders widely expect the BOE to leave rates and Asset Purchase Programme targets unchanged. Yet recent disappointments in economic data will leave focus on attached rhetoric and especially the final vote tally on the majority decision.

The British Pound even slipped against the downtrodden Euro as investors seemingly question the safety of the UK currency in the face of clear Euro Zone fiscal and political crises. Symptoms of investor panic were clear as Bloomberg quotes showed German 3 and 6-month bond yields turning negative as Spanish government bond yields surged. In recent months we’ve seen the EURGBP trade with a strongly negative correlation to periphery bond yields. The fact that the Euro/British Pound exchange rate failed to hit fresh lows is perhaps telling.

The British Pound previously appreciated as the UK seemed insulated from Euro Zone crises, but a continued decoupling of the EURGBP and periphery bonds may concern to GBP bulls. An important deterioration in domestic economic outlook likewise pushed UK bond yields to fresh record lows—sinking it against the especially yield-sensitive Japanese Yen.

Thus key British Pound crosses leave the Sterling lower ahead of a potentially pivotal week. Can the first full week of June produce a turnaround? Time will tell, and as our forex seasonality studies suggest, it could very well set the stage for price action through the end of the month. - DR

Written By David Rodriguez, Quantitative Strategist for DailyFX.com