Recently a survey by Ipsos MORI of the 24 largest world economies found that British negativity regarding its economic outlook was very high. With real estate prices soaring, especially in the choice London locations, native Brits feel left out. They must contend with higher costs of food and energy, in addition to higher taxes, at a time when their wages are stagnant. The Brits pessimism ranks them almost as negative as the people in Italy and debt ridden Spain.
Part of the Brits' problems are the result of government policies. For example, they have put a "green tax" on oil refineries. For years the refineries used the light crude from the North Sea, but as that supply is being depleted, they have had to adjust to refining a heavier crude. The heavier crude is more expensive to import and to refine into diesel fuel. Confronted with more expensive costs, several refiners have halted operations. Naturally this has resulted in higher costs for diesel, and even in some cases shortages.
There is another conservative policy which hurts the British economy. According to Rowena Mason, reporting in The Telegraph.uk:
"The U.K.'s largest gas field to remain shut as Centrica blames George Osborne windfall tax. Centrica, the owner of British Gas, has confirmed the closure of Britain's largest gas field in response to Chancellor George Osborne's windfall tax on North Sea profits.
"In a surprise move, Mr Osborne raised the effective tax rate on production profits to at least 62pc and up to 81pc for older fields in his March budget when oil prices are more than $75 per barrel. However, companies have complained that this unfairly penalizes gas fields, because gas prices are comparatively much lower than the oil price. Producers have warned the tax regime will hasten the decline of the industry because it makes older fields uneconomic. They claim it may also hit the U.K.'s energy security by increasing the reliance on imports, while continued tax changes have made Britain one of the world's most unstable financial regimes for producers."
Compared to the consistently weak U.S. economic numbers, the U.K. economy has shown signs it will be able to muddle through, overcoming the economic headwinds caused by Conservative efforts to cut the deficit. This may have been part of the reason when the pound appreciated from 1.6050 to 1.6540 during May. Since then, despite ample U.S. negative news, the pound has drifted back down to the 1.63 handle.
And the USD bear news continues. This afternoon it is reported that Moody's intends to cut the U.S. credit rating unless the debt ceiling problem is settled. So far the U.S. Treasury has found ways to wiggle around the debt ceiling, and is even offering $63B of new three, 10 and 30 year debt next week.
Tomorrow morning we get the British Services PMI report which is expected to be steady, around 54.4. This will be followed by the always volatile U.S. NFP Report. Expectations for the NFP report have recently been reduced, so we may have a set up where a number like the 194K earlier guess could be friendly.
Considering the expected volatility, we prefer to first see the numbers and trade from there. Our buy side ideas would be around the 1.63 area, and we would be sellers on a return to the 1.6470 area. The 4H MACD shows signs of turning lower. We will be watching to see if this might be indicative of a lower pound once the market digests the news.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
