I don't want to dampen your mood but I don't want to sugarcoat things either. In today's issue of Piponomics, I'll take a look at the top 4 reasons why I think the pound will most likely continue to fall.
1. Interest Rate Expectations Have Fallen
One of the key reasons the pound was able to stay afloat early this year was the market's interest rate expectations due to the country's high inflation rate.
Unfortunately, this is now a thing of the past as the most recent Monetary Policy Committee (MPC) meeting minutes showed that the number of members in favor of a rate hike has fallen to zero.
Spencer Dale and Martin Weale, two committee members who had been calling for a rate hike for six straight months before, decided to change their stance due to the worsening economic outlook of both the U.K. and rest of the world.
According to them, global growth has not been performing up to par, and the uncertainty in the financial markets in Europe would put some strong downside pressure on inflation.
2. Unemployment is Rising
In the latest U.K. jobs data, unemployment was reported to have risen by 80,000 during the second quarter. This marked the largest increase in almost two years, bringing the number of unemployed people in the country up to 2.51 million.
What this tells us is that the private sector is unable to create enough jobs to keep up with the ever-growing supply of workers and both new entrants to the work force and the number of people losing jobs.
3. The Possibility QE2 has Increased
The bearish tone of the meeting minutes, along with the damage caused by the social unrest in August and the disappointing retail sales report last Thursday, has fueled quantitative easing speculations.
Right now, there is a big threat that the U.K. economy may grind to a halt and actually shrink in the third quarter. The BOE may have no choice but to stimulate the economy through unconventional means.
4. Technically, GBP/USD is on a Downtrend
A look at GBP/USD's daily chart will reveal that after piercing slightly above the 1.6600 major psychological handle, GBP/USD has fallen for the most part. Since August 18, the pair has lost around 5% of its value, which is equivalent to around 800 pips.
That's it for today folks! These are the top 4 reasons why I think the pound will fall. Don't take my word for it though!
Do your own analysis and come up with your conclusion! If you disagree with me, feel free to share your thoughts below!
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- MPC Meeting Minutes: Not as Bullish as You Think! 05:32 28 January 2011
- 4 Reasons Why a Rate Cut From the RBA is in the Cards 05:50 30 October 2011
- MPC Minutes To Let Loose Another Hawk? 05:23 22 February 2011