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Nonfarm Payrolls Support Fed Aspirations, Ensuring GBP/USD Divergence

Nonfarm Payrolls Support Fed Aspirations, Ensuring GBP/USD Divergence

While the headline reading of 156,000 jobs being created in the US economy over the previous month might not be enough to inspire further dollar strength across the financial markets, the United States has released another solid jobs report that supports the aspirations of the Federal Reserve to raise US interest rates before 2016 is over.

The market expectations will decline slightly following a weak headline number, however, the data suggests that wage growth is accelerating and this can create further dissent within the Federal Reserve and sway other policymakers towards voting for a US rate rise over the upcoming months with their public commitment towards raising US interest rates in 2016 becoming perfectly clear in recent weeks.

The major headline around the financial world is the dramatic decline seen in the British pound overnight with the currency meeting levels not seen in a generation. The GBP/USD hit the floor at a phenomenal speed during the Asia trading session, noseping all the way from 1.26 to 1.18 within minutes. The reasoning for such an astonishing drop is being debated with some attributing this to a trading failure, but nobody truly knows and I am not buying into this as the only reason.

Investors have been heavily spooked throughout the week, following UK Prime Minister Theresa May confirming that Article 50 will be invoked in March 2017 and concerns circulating before that the process of leaving the EU does not need to take the widely reported two years. When you also combine defiant comments from both the UK government and EU counterparts on tough negotiations, you can’t rule out that market sentiment was not also responsible for what transpired overnight.

The buying sentiment for the pound is at extraordinarily low levels and it will remain this way if the UK government and Theresa May continue to indicate that they are determined to push ahead with Article 50 and tough exit negotiations. There are literally no buyers for the pound in these current market conditions and the decline we are now seeing in the pound is reminding me of what we experienced in the euro in 2014, but at a far higher intensity.

You have to consider that what we have experienced in the pound over the past couple of months with investors now pricing in the EU referendum implications and a period of political instability before that is something that we have rarely associated with a developed market like the United Kingdom, which can in many ways explain why investor attraction to the pound is haunted.

We need to really make it clear that until recently, all investors had done was price the EU referendum outcome into the pound and they are only now beginning to price in the ramifications that the United Kingdom will soon begin negotiating its exit from the European Union. I can only compare this situation to circumstances where a sentence has been declared and made official, but the process now needs to begin where the UK government will be carrying out the sentence that has been declared by the voters and this is ultimately why investors need to get used to the pound remaining at such depressed levels, and falling even further over the prolonged future.

Basically the United Kingdom is going to enter the unknown of beginning a process to exit the European Union, and the future declines that I expect to be experienced in the pound can only be summed as quite simply one-way traffic.

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