The pound is definitely not off to a good start this 2013. Since opening at 1.6235, GBP/USD has lost about 6.4%. But with bad news plaguing the currency left and right, it’s no surprise to see why it hasn’t gotten any lovin’.
For one, it got dragged down by rumors about the U.K. leaving the European Union. Talks of another dip to recession also didn’t bode well for the pound. Just last week, the retail sales report recorded the slowest pace of growth in consumer spending as it printed a 0.1% contraction.
But I believe that all things come to an end and the recent pound sell-off is no exception. Here are four reasons why I think the pound is nearing a bottom:
#1 – The labor market is showing signs of improvement.
On Wednesday, the employment reports from the U.K. caught almost everyone by surprise. Jobless claims hit their lowest since June 2011 when the report for December showed that the number of people who filed for unemployment benefits dropped by 12,100. Consequently, the decline translated to an improvement in the unemployment rate which settled at 7.7%, down 0.1% from November.
One reason for the increase in jobs can be explained by the dismal rise in wage growth. Salaries only grew by 1.5% versus the 1.6% forecast. This means that employers probably saved on pays to spend more in hiring more people.
But still, job growth is still good news! (Right?)
#2 – The MPC is not so sure about more QE.
The minutes of the most recent BOE MPC meeting showed that policymakers are hesitant about restarting their asset purchase program. Although one PMC member, David Miles, voted to increase the value of the program by 25 billion GBP to 400 billion GBP, the rest of the crew felt that it was not necessary.
Overall, it seems that the MPC’s confidence has been boosted by the U.S. fiscal deal and the pickup in growth in other economies.
The new kid on the block, Ian McCafferty who joined the committee in September, said that an increase would do very little to boost growth and would only risk stoking inflation.
#3 – The U.K. ain’t going nowhere.
For a while, word on the street was that the U.K. was going to leave the European Union. Many feared that economic isolation could further weaken the economy and the pound, and ultimately lead the U.K. to lose its AAA debt rating.
But Prime Minister David Cameron dispelled these rumors with his referendum speech earlier this week, where he reaffirmed the U.K.’s place in the EU (even though he has been unhappy with how things have turned out for Europe).
#4 – GBP/USD is facing support on a rising trend line.
Sellers will have to muster up a lot of power to break the rising trend line on GBP/USD’s weekly chart. Each former test of support was met with a strong influx of demand, so it will probably take a major development for this uptrend to come to an end.
But as the saying goes, “Let the buyer beware.” As you can see, there is still a bit of room for GBP/USD to fall before it reaches the long-term rising trend line. Besides, just because we’re faced with reasons for the pound to rally doesn’t mean that it will.
As for the strong jobs figures, earnings growth seem to be tempered at the moment, which suggests that employees don’t have much negotiation power amidst rising household costs. Let’s also not forget that the Q4 2012 GDP report printed a much bigger contraction of 0.3% than the 0.1% decline that markets anticipated.
Then again, these are just my two cents on the matter. I’d like to hear what you guys have to say. Where do you think the pound is headed in the coming weeks? Hit me up with your thoughts in the comment box below!