Cable Breaks 1.5800 But Retreats as UK Unemployment Declines

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Market Drivers for September 11th, 2013
Obama asks Congress to delay vote
UK employment beats sending cable through 5800
Nikkei 0.1% Europe 0.1%
Oil $107/bbl
Gold $1367/oz.

Europe and Asia:
JPY CGPI 2.4% vs. 2.3%
AUD Westpac 4.7% vs. 3.5%
GBP Claimant count -32.6K vs. 21.2K
GBP Unemployment rate 7.7% vs. 7.8%

North America:
USD Wholesale Inventories 10:00

UK unemployment fell unexpectedly sending pound surging in morning London trade as the pair crossed the 1.5800 barrier for the first time in eight months. UK claimant count fell by -32.6K versus forecasts of -21.2K while unemployment rate declined to 7.7% from 7.8% anticipated.

The quarterly unemployment rate of 7.7% is at its lowest level in more than a year and is a testament to the fact the UK economy continues to rebound strongly after being mired in a series of contractions since the 2008 financial crisis. The decline in the unemployment rate is likely to put further pressure on the BOE to curtail its dovish stance.

Governor Carney has noted that BOE would change its accommodative stance if the unemployment rate dropped to 7% or less – a goal many analysts find difficult to achieve given the fact that the UK economy would need to generate 1 million new jobs in order to meet that target. Nevertheless, the BOE chief will likely be questioned thoroughly at tomorrow’s Parliament hearing where he will have to explain his stance in great detail to UK legislators.

Although cable initially soared through the 1.5800 level, the pair quickly gave up most of it gains as currency traders remained wary of Mr. Carney’s testimony. If the BOE chief remains unapologetically dovish in spite of the clearly improving UK economic landscape, cable could see further profit taking as markets will continue to price ultra low UK interest rates for the foreseeable future.

However, if Governor Carney acknowledges the recent strength in the UK economy and assumes a more neutral tone in front of the Parliament, cable could quickly revisit the 1.5800 level as bullish sentiment returns.

Elsewhere, the price action was generally muted as markets saw only a limited reaction to President Obama’s speech to the nation that asked for a delay on the Senate vote on Syria. The capital markets remain in a wait and see mode on Syria as politicians try to craft a diplomatic solution, but the situation remains highly volatile and risk aversion flows could return in a heartbeat if the possibility of military intervention once again becomes a real concern.

Boris Schlossberg
Managing Director

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