Pound Weakness May Be A Setup To Buy

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 |  Includes: FXB, GBB
by: Ralph Shell

Summary

Pound continues under pressure as the employment and wage numbers fall short of bullish hopes.

Economic success in Britain is attracting migration from the Continent as the unemployed there seek work in England. Increased job seekers may be hindering wage increases in the UK.

Estimates of the rate of economic growth forthcoming soon in the EU, will show a slow growth economy flirting with deflation.

Today the markets take on the economic news coming from the UK is bearish on the pound. The unemployment was reduced to 6.4% from 6.5% last month, and the unemployment number was reduced, but not as much as hoped for. Finally, the earnings increase fell short of expectations. The absence of earnings growth is given as a reason to be bearish the pound. Inflation, the result of higher wages, is not happening, therefore the need to raise interest rates is postponed. Personally, the logic seems a touch faulty.

Increasing employment numbers happen late in a business cycle. Hence, they are lagging indicators.

The economic revival in Britain, compared to the Continent must also be considered. There, the unemployment remains high as workers are confronted with German austerity, and the misconception that one policy and one currency best suits all Eurozone members.

Residents of the EU, however, are free to migrate. The British success has resulted in migration to the islands in search of work. Net migration into the UK was 212,000 in 2013. Britain will remain a beacon for those in the EU seeking work. Now, with deflation working in the EU, it is improbable wage inflation will plague Britain.

The employment news may not be as bearish as the market action. In the middle of July the GBPUSD (FXB, UUP, UDN) was flirting with 1.72. Now there has been a 500 pip break to 1.67. The COT report of futures and delta adjusted options showed specs were long over 60K contracts at the peak in July. The last report showed longs were down to 28K. Weakness since has no doubt caused further liquidation.

The pound has also weakened against the euro. The EURGBP (NYSEARCA:FXE) is not as volatile as some other pairs but the euro has been a big loser to the pound dropping from almost .84 to .7875. The pound liquidation has taken the pair back above .80 where we favor selling the EURGBP.

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On Thursday, August 14, there will be a flood of data pouring from the EU, mostly pertaining to the anticipated rate of growth. The estimate for EU GDP growth is forecast to drop to 0.7% from the previous estimate of 0.9%. With the big spec short, there is that possibility of a short squeeze at any time. Still, the outlook for the eurozone economy remains bleak. Unless there is a dramatic expansion of the money supply, which is bearish the euro, their economy will continue to deflate, which also seems negative.

There is also the possibility the Russian Ukrainian conflict will again take center stage. A 200 truck convoy is headed from Russia to the Ukrainian border with "supplies." Kiev leaders vow these trucks and their cargo will not be permitted to enter their country. Since the European economy is at greater risk because of this disturbance at their eastern border, the currency is more vulnerable.

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Over several months, we can see the EURGBP selling down to the .7750 area. As always, manage your money.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.