UK Unemployment Plunges-Puts Pressure on BoE

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Market Drivers for January 22, 2014
UK Unemployment plunges to 7.1% cable soars to 1.6550
Aussie CPI hot at 0.8% vs. 0.5%
Nikkei 0.16% Europe 0.08%
Oil $95/bbl
Gold $1239/oz.

Europe and Asia:
AUD CPI 0.8% vs. 0.5%
GBP Claimant count -24Kvs. -33.8K
GBP Unemployment rate 7.1% vs. 7.3%

North America:
CAD BOC at 10:00 AM

UK unemployment rate plunged to 7.1%, its best reading in nearly 5 years, propelling pound to fresh weekly highs above 1.6550 in morning London dealing today. The UK labor statistics were much better than the anticipated rate of 7.3%. The decline in the unemployment rate now puts it within a whisker of the BoE threshold of 7.0%, although the UK central bank was very quick to note that there is no immediate need to raise short term rates even if the threshold is breached.

Although the UK labor data was impressive, there were some notes of concern that are likely to keep BoE stationary for the time being. UK claimant count did not drop as much as expected contracting only by -24K versus -33.8K eyed and average earnings rose a paltry 0.9% versus 1.1% forecast suggesting that wages remain depressed for the time being.

The MPC therefore is likely to maintain its current monetary policy for the foreseeable future until it begins to see signs of price pressures in the system. As members noted in their minutes, “Members therefore saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future. Moreover, it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained. Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually.”

Cable rose to 1.6550 in the aftermath of the news, but receded off its highs on some profit taking in mid morning London trade. The news was clearly supportive of the pair, but BoE persistent dovishness suggests that any policy changes may take a while to develop. Nevertheless, the continued strength of the UK recovery bodes well for sterling and indicates that the very minimum the pair should see relative strength against the dollar for the time being.

Elsewhere, the Aussie got a boost from much hotter than expected CPI numbers. CPI rose 0.8% versus 0.5% eyed and even more on a trimmed mean basis to 0.9% from 0.6%. The data instantly pushed AUD/USD up by more than 80 cents to 8875 on speculation that RBA will not be able to lower rates any further. Despite the lackluster pace of growth in AU economy, the CPI data indicates that higher import costs are clearly seeping into the system putting upward pressure on prices.

With RBA constrained for the time being, the Aussie may now find some support at the 8750 level as threat of further rate cuts has receded and may even stage a counter trend rally on the crosses especially against the loonie.

Today’s BOC meeting is likely to maintain its dovish tone as Canadian economic growth remains weak. Yesterday slight jump in Manufacturing sales notwithstanding the data from the North has been highly disappointing and the miss in Wholesale sales numbers indicates that demand in Canada remains tepid. The BOC therefore is likely to stress that it will remain accomodative for the foreseeable future and that could send USD/CAD above the 1.1000 level once again as the day proceeds.

Boris Schlossberg
Managing Director

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