3 Reasons Why the Pound Could Keep Climbing

In an earlier edition of Piponomics, I gave y’all a rundown of the major events that could rock the pound’s socks this week. Now that the dust has settled, here’s a quick recap of what happened and how the British currency could stay supported in the forex market:

1. Union Jack will stay a union!

The nays have it! In a nail-biting turn of events, the anti-independence camp managed to escape with a narrow victory to keep Scotland in the United Kingdom. Even though the official results haven’t been released yet, exit polls from the council areas revealed that majority of the Scots didn’t want to break up with the U.K. for now.

penguin scotland independence

Yep, I’m still British!

Glasgow, Dundee, West Dunbartonshire, and North Lanarkshire (Yes, those are real places, not kingdoms in the Game of Thrones!) reported wins by the pro-independence voters while the remaining constituencies favored the status quo. I guess Scottish National Party leader Alex Salmond’s reenactment of William Wallace’s speech in “Braveheart” ain’t happening anytime soon!

With that, the prospect of political and economic uncertainty stemming from Scotland’s secession is no longer a thorn in the pound’s side, allowing forex traders to put their focus back on U.K. fundamentals once more.

2. Upside surprise in U.K. jobs data

Drowned out by bagpipes and all the fanfare surrounding the Scottish referendum was the impressive U.K. jobs report for August. The report showed a much larger than expected 37.2K drop in unemployment, enough to bring the jobless rate down from 6.4% to 6.2% during the month. To top it off, the July report was revised to show a 37.4K decline in joblessness from the previously reported 33.6K drop.

As though the four consecutive months of better than expected hiring gains weren’t good enough, the U.K. also reported a pickup in wage growth last August, easing fears that the persistent economic slack would continue to weigh on inflation and growth. Average earnings picked up by 0.6% while the previous month’s reading was upgraded to show a smaller decline.

3. Two BOE officials still voted for rate hikes.

Not even the recent downturn in U.K. inflation was enough to stop MPC members Martin Weale and Ian McCafferty from voting to hike interest rates in the latest BOE meeting, although policymakers still unanimously agreed to keep asset purchases unchanged. Majority of the committee members thought that it might be too risky to tighten monetary policy early, as the ongoing slowdown in the euro zone could pose another threat to U.K. growth.

Bear in mind though that the committee upgraded its GDP forecast for this third quarter to 0.9%, higher than the nation’s long-run average growth, which means that they’re a tad more optimistic about economic prospects. After all, BOE Governor Carney did express confidence that they could start hiking interest rates by spring next year.

Do you think these reasons will be enough to keep the pound strong? Share your thoughts in our comments section or vote in our poll below!

  • Peter Griffin

    Since I started trading Forex, the Pound always had a bullish character in my opinion. I was always amazed, how quickly and strongly this currency and economy apparently recovers and gains. I think it will be in for more gains, if they data doesn’t disappoint.

  • ForExchange

    Hi Forex Gump,

    great article as usually!

    Usually I do not write a comment because when you make articles about reasons “to gain” or “to lose” I think mostly the analysis are true vs. all currencies in the short-term at least.

    This time I see it a bit other and I think it could have been a bit better if you divide a bit the currencies that GBP could rise vs. some currencies and fall vs. others.

    My reasoning is that GBP is still a good performing economy from the 8 economies we follow here, but are not number 1 anymore as they were last year. I am for example short on GBP/USD, got in already in the retracement of the big jump today. Currently all pairs are retraceing but I think it will be a difference by how much.

    I think your analysis could be very right with GBP gain on EUR, NZD and AUD for example but with USD I am skeptical.

    I know, you did not say it will definitely rise against all, I am aware of that. All I meant is that this case I find a bit different as the other articles when you analyse economies as the others usually are true for all currencies.

    Have a nice weekend.

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