Can the British pound fall any further?

At the time of writing sterling today had risen by 0.6% to be 1.5344 against the US dollar. Part of the contributor to this was a fall in UK unemployment of 33,000 for the 3 months to January 2010 putting unemployment at 2.45 million or 7.8% today. Now I don’t watch this indicator regularly however if you read into the figures a little deeper it doesn’t look all rosy to me.

For me the real news is that the number of jobs in the private sector has fallen for the 3 months to December 2009 by 61,000 and in the same quarter the total number of people employed fell by 54,000 to 28.86 million which is the lowest level since 1996. Now unless the following has occurred over those 3 months:
- private sector losses have been replaced by machines;
- those remaining in the private sector are worker harder;
- those remaining in the private sector have become more efficient; and/or
- those remaining in the private sector are now different jobs that add more value for each hour worked
to balance out the losses I can’t see how this latest news is good for the economy or GDP.

Now the 0.7% rise in sterling today is but a small blip compared with the 23% loss in value seen against the US dollar over the past 2 years and the 5% loss since the start of the year. However it’s easy to see why the markets don’t like the UK very much at the moment:

- a hung parliament could be a possibility for the first time in around 40 years at the upcoming election scaring the markets that the necessary cuts to the public sector and/or increased tax rises to sort out government borrowing could be delayed;

- speaking of government borrowing the fact that the UK will this year borrow £178 billion. This is 12% of GDP and is on par with Greece and we know how much they have been in the news recently;

- on top of this the Bank of England has quantitative eased (QE) to the tune of £200 billion and stated in their letter to Chancellor Darling that they would continue with it if necessary;

- the extra work undertaken by the Bank of England is to keep the Official Bank Rate at 0.5% while inflation runs at 3.7%; and

- Prudential's bid of £23.5bn for AIG's Asian business may mean the company will sell sterling and buy US dollars to finance the deal.

In a morbid kind of way I hope that we get a hung parliament, indecision / bickering of the parties prevail leading to the debt not being addressed, a bond strike or similar occurs and the International Monetary Fund (IMF) has to bail us all out. In my opinion in the longer term this could be a better option as they would at least make us take our medicine. This would cause a lot of short term pain while maybe the housing market corrected itself, those who had over leveraged themselves went bankrupt, the bloated public sector was cleared out and the zombie banks (who would be bankrupt if they were a private company) were wound down. However, once this had happened then we would be at the bottom of the economic cycle and the economy would then be in a position to grow strongly again.

This brings me to my chart today. There is plenty of talk around at the moment about the low value of sterling however the trend line of my historical chart showing sterling to the US dollar suggests that sterling has been in a long term decline against the dollar since 1971 and is now about on trend. The rate is however lower than the arithmetic mean of 1.787.

The final point I will make is that the chart shows a lot of resistance at around the 1.40 mark however there is also plenty of downside potential from here when looking at history. In February of 1985 the rate was as low as 1.052. Now that would affect the price of the fuel in your car, a bottle of Australian red wine or that holiday to France. It would certainly make anybody earning sterling feel a lot poorer.

As always DYOR.