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Market Analysis

Fundamental Analysis: Pound up after Stronger Data

June 11, 2019
BY Michael Stark

A reasonably good result from this morning’s British data has helped the pound to strengthen in many of its pairs. Both average earnings and unemployment change printed stronger readings than expected. On the other hand, claimant count change was somewhat negative. Data has temporarily overshadowed the Conservatives’ leadership contest and other political news.

Cable made quite a big gain in the mid-morning GMT, moving slightly above the key area of $1.27. The pound also rose to about ¥138.12, close to its fortnight high against the yen. EURGBP fell as well, but was unable to break much below 89 pence.

Strong growth in wages outpacing inflation

Average weekly earnings including bonuses rose by 3.1% in April, beating the consensus slightly. Although this morning featured the weakest figure since September last year, it’s still a full 1% higher than annual inflation. The strong growth in average British wages since Q4 2018, outstripping inflation for some months now, is a significant positive for the pound. Other factors aside, wages significantly higher than inflation usually leads to higher consumer spending.

Although the UK’s unemployment rate met expectations exactly, the release is still significant. For the second month running, 3.8% is the lowest figure since late 1974. Combined with growing wages, this suggests that Britain’s job market is very strong considering the circumstances of uncertainty over Brexit.

Today’s only negative in data was claimant count change. The figure indicated that about 23,000 new people signed on for unemployment benefit. However, this was only slightly higher than the consensus of approximately 22,000. The negativity that might have resulted from this was muted somewhat by last month’s figure being revised downward to 19,100.

Orderly Brexit could mean a rate hike

Today’s hearing by Parliament’s Treasury Select Committee also brought some positivity for traders of the pound. Two of the members of the Bank of England’s Monetary Policy Committee reacted with unusual positivity to this morning’s news. Michael Saunders in particular commented that more rate hikes are in view if Brexit is relatively smooth.

Brexit uncertainty as usual

The fundamental picture beyond data is quite negative for the pound. Although there is little recent news of Brexit itself, the Conservative Party’s leadership contest is an important ongoing event. Policies of the various frontrunners range from disruptive exit in October to another extension.

With Boris Johnson the current favorite, the chances of a chaotic Brexit remain high. Some positivity has come from Rory Stewart’s candidacy looking slightly less unlikely over recent days. Mr Stewart is so far the only hopeful to explain clearly why he would rule out Brexit without a deal.

For forex traders, the Conservatives’ leadership contest is basically a negative factor. It has also driven volatility, though. It remains fairly unlikely that a near-certain winner will emerge before the second ballot a week today. In general, then, traders should be prepared for considerable instability in the price of the pound over the next few days at least.

Politics and maybe shares driving the pound this week

There’s no more data from the UK this week, so traders’ attention is likely to turn back to who might be the next PM. Traders seem to be fairly sure that an eager Brexiteer is going to be Britain’s next leader. However, if a more moderate outlier like Mr Stewart gains traction, it’s possible that the pound could make gains.

The BoE’s governor Mark Carney is giving a speech on Friday at the Women in Banking and Finance Awards. It’s very unlikely that any of his comments will address monetary policy. Traders are more likely to look at correlations in the pound with the FTSE 100’s movements.

A number of key data points for paired currencies could also affect the pound this week. The biggest are American inflation releases tomorrow at 12.30 GMT. However, traders of GBPUSD and EURUSD will probably also monitor German inflation in the early morning tomorrow and the USA’s retail sales and consumer sentiment on Friday afternoon.

GBP’s direction seems to be downward

Despite this morning’s positivity, uncertainty over the next Prime Minister is an important negative factor. Losses are the most favorable scenario for the pound in most pairs over the next few days. The scope of such a downward movement would depend to a great extent on key technical levels.

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