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Market Analysis

Fundamental Analysis: Pound Firm after Solid Job Data

March 19, 2019
BY Michael Stark

The pound has been mostly steady against other major currencies today in the aftermath of better than expected employment data from the UK. This is despite ongoing political chaos over Brexit. Shares have also given some support to the pound.

Cable has made a slight gain overall today to around $1.328 at the time of writing. Meanwhile the euro has been somewhat volatile though without much direction at about 85.5p. Pound-yen has also remained basically static near ¥148.

Strong job data this morning

This morning’s employment data from the UK was highly and unexpectedly positive. Average earnings remained the same, although a slight decline had been predicted. Employment change was up 222,000 against expectations of 120,000 and the previous figure of 167,000. The only negative was claimant count change which at 27,000 is over double the expectation.

Most importantly of all, January’s unemployment rate is a low of at least 40 years. The decline of unemployment below 4% despite ongoing Brexit chaos is a highly positive factor for the pound, giving significant fundamental support for the currency.

How exactly this morning’s figures fit in with some rather gloomy releases from the UK recently remains somewhat unclear. Some economists have suggested that companies are hiring new workers instead of making expensive investments in machinery. This would help to explain declining business investment in the UK.

Brexit instability still in main view

Whenever discussing the pound, Brexit’s never far away. The Speaker of the House of Commons John Bercow has ruled out a third vote on Theresa May’s deal unless there is a substantial change in its content. This makes it very unlikely that the Prime Minister could organize another ‘meaningful vote’ before European parliamentary elections in May. A long extension of Article 50 appears likely in this case.

For the pound, the latest Brexit news doesn’t suggest a strong fundamental-driven direction in itself. Instead, the developments have mainly functioned to increase volatility for the pound in most of its pairs. Markets are eager for some certainty on Brexit, and this appears unlikely within at least the next few months based on recent events.

The Footsie meanwhile has made significant gains since yesterday’s opening to reach a notable high in today’s session. 7,325 at the time of writing is a gain of over 3% since yesterday morning and the highest level for the British index since early October 2018.

BoE and Brexit dominating this week

Ongoing developments around Brexit in Parliament and perhaps at the EU’s summit are the regular news likely to affect the pound this week. Rumors of the size of the extension Mrs May seeks for Article 50 might be the biggest factor here.

Also crucial for the pound this week is Thursday afternoon’s meeting of the Bank of England’s Monetary Policy Committee. The BoE’s decision on rates is due at 12.00 GMT on Thursday. Any change or even vote for change is extremely unlikely, but traders will watch very closely what governor Mark Carney has to say about the latest events from Parliament and how different Brexit scenarios might affect the economy and, by extension, the bank rate.

Even amid all the big news, traders should not forget data. British CPI is due tomorrow morning at 09.30 GMT, then February’s retail sales shortly before the BoE’s meeting at 09.30 on Thursday. These releases will probably be overshadowed by other events this week; however, it would be unwise to ignore them entirely.

Movements by shares are also likely to be in traders’ view this week. Most analysts are in agreement that the FTSE 100 is significantly undervalued, so a continuation of this week’s gains so far appears to be favorable. In this scenario, this pound would receive more fundamental support.

Possible gains for the pound

Based on current fundamentals in general, the pound might make some gains against most currencies over the next couple of days. Of course, Brexit news has the potential to change this completely. Traders should be aware that most GBP pairs are likely to be exceptionally unstable as March 29 approaches.

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