After nights and nights of reading up on economic reports, I have come to the conclusion that I hate the pound. Okay, okay, so I might be exaggerating a little but I think these are important things that every trader should know.
1) Sky-high Inflation
Just yesterday, UK released its consumer price index for January. It showed that the average level of consumer goods and services rose by 3.5%, much higher than the 2.9% increase seen in December. Take note that the BOE’s inflation target stands at 2%, making the current rate of inflation well above the bank’s target.
2) Worsening Unemployment
I’m not going to mince words: UK’s labor market stinks to high heaven. For more than half a year, the country’s unemployment rate has been stuck between 7.8% and 7.9%. Looking beyond the headline figure would reveal that joblessness could have been higher, if not for the uptick in part-time workers.
3) Close to Zero Economic Growth
Although the UK rejoiced over finally escaping the recession during the last quarter of 2009, its economic growth was hanging by a tiny thread. In fact, the anemic 0.1% quarterly GDP reading came short of the estimated 0.4% growth. And, of course, there’s always the possibility of a downward revision later on… Heck, BOE policymakers even project that economic growth could slump back to the negative zone in the coming months!
4) High inflation + High unemployment + Low growth = Stagflation!
As I mentioned in my previous article, high inflation, high unemployment, and low growth pose a triple-threat known as stagflation. Rising price levels, amidst the backdrop of declining wages and worsening labor conditions, puts a constraint on economic growth. Now this is a nasty situation to be stuck in and it doesn’t help that targeting only one part of the problem could worsen the rest.
5) Looming Debt Threats
Time and again, we’ve been hearing of the UK’s debt problems and the possibilities of a credit rating downgrade. Even though the UK’s debt situation has been overshadowed recently by Greece’s own debt woes, the fact remains that the UK is still burdened by a bulging government deficit. In fact, Morgan Stanley warns that the UK could be the first of the G10 nations to suffer a full-blown debt crisis in the near term. Yikes! Fiscal instability could further undermine the already shaky growth prospects of the nation.
6) Exposure to Dubai’s Credit Risk
Late in 2009, the UK got a big scare when news came out of Dubai that they could default on their sovereign debt. Let me remind you that the UK has a 40% stake in Dubai’s debt. These fears have subsided for now… but for how long?
7) Spill-Over Effect
While the UK is not part of the euro zone, whatever happens in the euro zone doesn’t necessarily stay there. It ain’t Vegas baby! Remember, euro zone members remain some of Britain’s biggest trade partners. With all their problems (ahem, Greece), they may just plunge back into recession and drag the UK along with them.
8) More QE! *Gasp*
In its last meeting, the BOE left the door open for further quantitative easing given the government’s weak fiscal position and the economy’s stagnant growth. The risk of a double dip recession, according to some economists, is not impossible, especially if the UK’s government doesn’t commit to cutting its ballooning budget deficit. Expanding the central bank’s bond purchase facility to stimulate growth could also cause the country’s inflation to spiral out of control, effectively lowering the purchasing power of the pound.
9) No Rate Hike on the Horizon… Yet
With the central bank leaving its door open for more quantitative easing, there are reasons to believe then that the bank may also cease from hiking their interest rate at least for this year. The bank reasoned that they wanted to keep the economy growing since they said that the recent jump in inflation was only caused by the sharp surge of oil prices from last year.
10) Political Uncertainty
With elections looming later this year, there is a lot of uncertainty looming in the UK political sky. Does Gordon Brown and his merry men have what it takes to carry the UK out of this mess? If a new political force emerges, will they take a step in a new direction and make Britain “great” once again? Or will change cause a delay that simply pushes the UK economy back a few more steps?
So above are my top 10 reasons for not being too gung-ho about the pound. But hey, you’ve got to look at bright side. They still have all time hotties Kate Beckinsale and Keira Knightley, right? Seriously though, if you believe in the old saying, “Buy when there is blood in the streets,” then perhaps now is a good time to do so. Otherwise, you can always sell!