On August 13, 2019, the Office for National Statistics (ONS) released Labour market data for the period April -June 2019. It reported that the UK has achieved a joint-highest employment rate on record after the beginning of comparable records in 1971. UK employment rate for April to June 2019 period was estimated at 76.1%. The unemployment rate was estimated at 3.9%, slightly lower than 4.0% from the year-ago period, although on a quarter-on-quarter basis, the unemployment rate increased by 0.1 percentage point. The UK economic inactivity rate touched a joint record low of 20.7% during the period April -June 2019.
Meanwhile, Pound pared some losses on August 12, which was realised during the first week of the month of August and traded higher in the market session on August 13. Post strong wage and employment data released by the Office for National Statistics, we have witnessed some gain in Sterling against major currencies.
Labour market data is not likely to have a very substantial impact on the Pound or monetary policy decision as the Bank of England’s hands are tied against uncertainties related to UK’s withdrawal from the EU bloc.
Brexit related uncertainties weigh heavily on sterling, and it will continue to put pressure on it. The currency is falling since Boris Johnson made a statement to take Britain out of the European Union with or without a deal. In the month of July 2019, the Sterling plunged more than 4.0%, the highest decline since October 2016. Since the Brexit referendum took place on June 2016, sterling has given up more than 16% of its value.
Therefore, the movement in sterling is not much dependent on the labour market data and the associated risk is skewed to downside vs the Euro and Dollar with disorderly Brexit very much in sight. The latest wages and employment data would in normal times make the Bank of England prepare the market for a round of rate hikes. However, with British economy sliding gradually, due to Brexit related fog, the economy needs a stimulus. There is a greater possibility that a rate cut will follow Britain’s divorce from EU on October 31, 2019, and this is likely to be debated at the next BoE meeting.
On August 13, 2019, there was a preliminary hearing at the Court of Session in Scotland to prevent Brexit from happening without a deal on October 31. The legal challenge, which is backed by 70 MPs according to the media sources, proclaims that shutting down British Parliament to force through a no-deal Brexit would be unconstitutional.
The marginal move in the Sterling post job data released by the ONS will serve as reminder to financial market that British currency could still be swung by economic data despite largely remaining dependent on Brexit related uncertainties.
On July 04, 2019, we have seen a steep plunge in the Sterling against a basket of major currencies, as “Red Cross” hit the GBP/USD pair on July 04, the short-term moving average intersected the long-term moving average and started trading below its long-term support level. As on July 04, 10-day Exponential Moving Average (EMA) breached the 30-day EMA support level and since then Sterling is on a downward spiral in the forex market. “Red Cross” is a technical measure which indicates that asset has entered into a steep downtrend.
Also, the 14-day Relative Strength Index indicates a down-trend in the Sterling, as it entered an oversold zone; however, some of the August’s first-week losses have been recouped since the beginning of the second week of August 2019. However, when we analyse the RSI chart over the past one year, it reflects that number of times the currency pair has touched the lower base of RSI or crossed lower RSI, threshold was significantly higher than the number of time it has touched or crossed overbought RSI threshold, which reflects a bearish trend in the Sterling which could be prevailing for some more time.
US$ 1.1928 is a crucial support level for Sterling, and US$1.2350 is essentially a resistance. Any movement beyond these support and resistance levels could indicate a clearer direction in the short term. However, Sterling was trading substantially below its 90-day moving average, indicating a mid -term weakness.
At the time of writing (as on August 13, 2019, before the market close), GBP/USD currency pair was quoting at 1.2122 and added 0.02% against the previous day’s closing level. In the past 52-weeks, it has touched a high of 1.3385 and a low of 1.2016 respectively, and at the current trading level, Sterling was 10.4% off its 52-week highs. On a Y-o-Y basis, Sterling is down by 8.5%, and on a YTD basis it is down by more than 10%. It has declined about 0.70% on a month-to-date basis.
However, Sterling has inched up against the Euro at the start of the second week of August 2019, and recovered from the 10-year lows it registered in the late hours of August 09, 2019, with the GBP/EUR exchange rate moving higher in response to signs of inflating political turmoil in Italy. The GBP/EUR exchange rate was under considerable pressure since May, this year, but recovered from multi-year lows at 1.0638 to trade at 1.0790 at the time of writing as on August 13, 2019 (before the market close), amidst signals that the Italian governing coalition could be on its way out.
Meanwhile, the Italian Senate leaders met on August 13, 2019, to consider a no-confidence vote on the coalition government headed by Guiseppe Conte post-Matteo Salvini’s League party withdrew support to the coalition in an attempt to capitalise on its increasing popularity in the polls. But the meeting yielded no consensus, and as a result, the entire Senate has been asked to come back from ongoing summer holidays to set a date for debating a no-confidence motion against prime minister, Giuseppe Conte’s government.
However, some recovery in Sterling was witnessed in the second week of August 2019. Many market experts believe that any pull-back in Sterling would be short-lived, amid heightened chances for a no-deal divorce of the UK from the EU.
Many economists and market analysts commented that given the increased chances that Britain will ultimately crash out of the European Union bloc without any formal deal, the chances of the Pound Sterling plunging with respect to the US dollar is becoming a more plausible topic of debate by the day. Newly appointed British Prime Minister Boris Johnson, in his role for less than a month, is now left to face critics rather than take concrete steps in order to prepare the economy for a possible no-deal Brexit. He should focus on government spending in order to stabilise the pound at the current rate.
However, falling Sterling has jolted market sentiment with investors shifting to safer asset-classes. This has led to a steep plunge in the mid-cap, small-cap and AIM segments of the London Stock Exchange. Also, these segments are highly exposed to the risks related to falling Pound as their majority of revenue comes from outside of the UK. Import based companies are suffering the most, as devaluation of currency has inflated their import bills, and this would continue to prevail amidst rising chances of a no-deal Brexit.
On the other hand, falling Sterling will have favourable impacts on those companies who have globally diversified revenue model, or whose majority of revenue comes from the overseas markets, as they will enjoy forex gains due to currency translation.
Recently, Members of the Monetary Policy Committee of the Bank of England (BOE) voted unanimously to keep the bank rate unchanged at 0.75%. This dragged the Sterling against the US dollar and it registered a new 52-week low of 1.2080 against the US dollar (on August 01, 2019). Also, the Sterling touched a level below 1.21 first time since January 2017. In the Inflation Report, the MPC stated that due to growing uncertainties on the potential structure of the divorce from the EU, the UK’s economy could follow a wide range of directions in the years to come. It further stated that the MPC’s response to the UK’s exit from the EU bloc could go either way, irrespective of the decision whether it’s with a deal or without a deal. The committee would frame appropriate policies to maintain inflation within the target of 2%. However, CPI inflation was in sync with the BOE’s target of 2.0% inflation for June 2019, and core CPI inflation was at 1.8%. The quick impact of the monetary policy would depend on the combined effects of currency supply and movement of exchange rates as the date of separation draws nearer.