Barely two months into 2016, the year has already proven tempestuous for the world’s financial markets. The markets have put in an especially dramatic performance, with the price of oil plunging, stock markets across the globe taking a nosedive, Germany’s banks losing billions, and China experiencing a global slowdown the likes of which it has never seen before.
Small wonder, then, that the forex markets have reacted, and that major currencies have seen phenomenal rises and fall as countries founder, and investors turn to traditionally safe haven assets to buoy up their portfolios.
It is one of these safe haven assets that has become the latest victim of said external influences. The pound, ever beloved of risk-averse traders, has seen a dramatic drop in recent days, on the back of the latest UK wage statistics.With sterling edging steadily lower against the dollar, we look at the market forces that are driving this trend…
The Pound Falls
The pound has long been viewed as a leviathan of a currency. Strong, almost indomitable, and incredibly buoyant, it has withstood the worst ravages of the global recession, held firm even when its European neighbours have dipped, and has frequently been turned to by traders seeking to save themselves from the worst ravages of the currency markets.
In recent days, however, the tide seems to have turned against it, with the latest wage statistics slowly driving down its value. With the pound edging ever lower against the dollar in the wake of a report illustrating slowing wage growth, it is now foundering, and traders are increasingly beginning to doubt its status as a safe haven currency.
It is not the slowdown in wage growth alone that has had investors running scared, but rather its implication that interest rates must necessarily remain on hold for longer. With traders fearing that this will limit economic growth for 2016, it comes at an unlucky time considering that this is a currency that normally thrives when the markets are at their most volatile, as they are now.
The Numbers Game
Of course, it is always interesting to look at the actual figures before allowing such information to guide your trading decisions, and these are not as dramatic as one might fear.
It is investors’ reactions that are more worrying. Although growth did decrease in the final quarter of 2015, unemployment rates and so on did not rise. Unfortunately, this stability was not enough to curtail the market’s negative reaction, and this resulted in GBP/USD sliding from 1.4289 to 1.4265.
A decrease in unemployment statistics, despite being expected, also failed to materialise, exacerbating this image of Britain in a worryingly static state. According to the Office for National Statistics, the unemployment rate was unchanged throughout the last quarter of 2015, remaining at 5.1 percent throughout.
Although this equalled its lowest figure since mid-2005, it indicated that the usual reduction in unemployment due to temporary Christmas tenures had failed to materialise, which indicates that the jobless rate may actually increase as this type of contract dries up and we progress through 2016.
Such figures were contrary to the projections of expert economists, who had forecast a reduction in joblessness to 5 percent.
A Potential Overreaction from Traders
Despite the reaction of the markets, however, the statistics are not as damning as the headlines suggest. Although joblessness remained at a static level, annual wage growth actually rose between October and December 2015, by a healthy 1.9 percent.
This figure matched or exceeded all available forecasts, which raises an interesting question with regards to the reaction of traders: was this merely sensational, or is there some merit to the market’s fears?
The answer may be argued either way, yet it should be stressed that there is some foundation for these concerns. Although wage growth did indeed rise over this period, it did show a slowdown from the September to November 2015 period, where it reached an impressive 2.1 per cent.
However, it could reasonably be argued that it is not the last quarter figures that go against the grain, but those for the three months leading up to November, which exceeded all expectations.
These should be celebrated, yet a reduction in them should not necessarily be taken as a sign of a weakening economy, but rather of one that simply cannot sustain such an extreme degree of growth. Indeed, it may be that a more stable increase is actually preferable.
A Skewed Picture
Thus, we could certainly claim that it is the November figures that have skewed the data, rather than the December figures that indicate a worrying slowdown. If we look at these with a more detached eye, this is the image that emerges.
Excluding bonuses, the figures indicate that wages for October through to December rose by an impressive 2 percent, above their original 1.8 percent estimate.
The number of people seeking unemployment benefits also fell, so that by January, this figure had reached its lowest level since 1975. This marked a decrease of 14,800, driving the overall total to just 760,200 people.
So, was there any real sense behind investor reactions, or do they indicate a mindless panic? Although it would be unfair to imply that there was no merit to this blanket loss of faith, the reaction by investors was arguably extreme, and seems unlikely to endure for long.
Britain remains in an incredibly strong position compared to many of its European and international neighbours, and the economic signs for the year ahead look overly promising.
This, of course, is good news for traders, and could, in fact, spell a rare opportunity to buy up a healthy store of sterling whilst prices remain low. With brokers like ETX Capital offering incredibly competitive rates, and the currency likely to bounce back in a matter of weeks, if not days, now may be the opportune time to make your move and invest in sterling.
Will you be bold enough to seize the opportunity that presents itself?