British Pound (GBP) on 22/01: Sterling Surges as UK Unemployment in Shock Fall to 7.1%, BoE Under Pressure to Raise Rates
- Last Updated: 02 April 2014
Updated: Our Live coverage shows the UK pound to be in a period of consolidation at the start of April 2014. With the March PMI series missing expectations the GBP has found little by way of impetus. However, all eyes are on the release of the Service Sector PMI on Thursday which should set the near-term tone.
Keep in touch with our Live Coverage Here. For the archived material for the day in question please scroll through please scroll down.
By Rob Samson
LIVE Exchange Rates - Updated Automatically
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17:20: Canadian dollar under significant pressure
The CAD has formed the basis of a 'sitting duck' trade thus far in 2014, particularly against Sterling. After today's hefy losses, where is CAD headed next? We look at the forecasts offered by TD Securities.
15:55: Danske Bank forecast GBP/EUR at 1.25 at year end
We have just published the EUR/GBP forecasts for 2014 issued by Danske Bank here.
15:20: Beware downside risks to sterling
"While the pound is likely to remain well supported, downside risk could materialise if the BOE lowers its unemployment rate threshold or otherwise tries to talk down the risk of a rate hike this year," warns Omer Esiner at Commonwealth Foreign Exchange.
13:05: FSB beg for more time at low interest rates
Commenting on the unemployment rate reaching 7.1%, John Allan, National Chairman, Federation of Small Businesses, said:
“Another set of positive unemployment figures reflect what our members tell us about their recruitment intentions. While weak pay growth remains a concern, we are hopefully turning a corner with seven in 10 small firms intending to increase staff pay in the next 12 months. Despite improvements in the labour market, we would like to see a prolonged period of business confidence before the Bank of England’s forward guidance comes into effect and increases interest rates.”
“Another set of positive unemployment figures reflect what our members tell us about their recruitment intentions. While weak pay growth remains a concern, we are hopefully turning a corner with seven in 10 small firms intending to increase staff pay in the next 12 months. Despite improvements in the labour market, we would like to see a prolonged period of business confidence before the Bank of England’s forward guidance comes into effect and increases interest rates.”
14:20: GBP/USD to target multi-year high at 1.6600?
Matt Weller at GFT considers the next steps for the GBP vs the USD:
"The GBP/USD exploded higher in today’s early European trade as the country’s claimant count dropped by 24k and the unemployment rate dropped to 7.1%.
"Though the unemployment rate is nearing the Bank of England’s target, they are unlikely to take any near-term action unless inflation picks up meaningfully. From a technical perspective, the pair may now target the multi-year highs near 1.6600 and buy opportunities will be favoured on intraday dips."
"The GBP/USD exploded higher in today’s early European trade as the country’s claimant count dropped by 24k and the unemployment rate dropped to 7.1%.
"Though the unemployment rate is nearing the Bank of England’s target, they are unlikely to take any near-term action unless inflation picks up meaningfully. From a technical perspective, the pair may now target the multi-year highs near 1.6600 and buy opportunities will be favoured on intraday dips."
12:54: Bank of America see UK rate cut Feb 2015
More insights into the timing of a potential rate cut at the Bank of England and possible amendments to the forward guidance policy. This from BofA Merrill Lynch UK economist Nick Bate:
"Over the next 3 days, BoE members Mccafferty, Fisher and Carney are all due to make speeches, which would provide an opportunity for them to give any more-recent thoughts on the monetary policy outlook if they wished (though BoE members rarely set out significant new views in speeches).
"But overall, the strength of the latest labour market data suggests that the BoE may update their Forward Guidance in the February Inflation Report, with consensus expectations very evenly split between them revising the unemployment threshold down to 6.5%, or moving to a looser "rates on hold until well past 7% unemployment" language.
"We do not think evidence thus far strongly supports cutting the threshold notably further, and ultimately we maintain our expectations of a first rate rise in February next year."
"Over the next 3 days, BoE members Mccafferty, Fisher and Carney are all due to make speeches, which would provide an opportunity for them to give any more-recent thoughts on the monetary policy outlook if they wished (though BoE members rarely set out significant new views in speeches).
"But overall, the strength of the latest labour market data suggests that the BoE may update their Forward Guidance in the February Inflation Report, with consensus expectations very evenly split between them revising the unemployment threshold down to 6.5%, or moving to a looser "rates on hold until well past 7% unemployment" language.
"We do not think evidence thus far strongly supports cutting the threshold notably further, and ultimately we maintain our expectations of a first rate rise in February next year."
11:56: Keep this in mind
Is there a split between the technical forecasters and the fundamental forecasters? It seems so! One group is bearish GBP/USD while the other is bullish, as noted by Investec today:
"We now sit just beneath the 1.6500-1.6520 handle that has capped moves higher on two occasions this year.
"Technical analysts would argue that a break and close above this level of resistance could be the start of a run towards 1.6747, the 2011 high. This is in contrast to the consensus view of Economists polled by Bloomberg which sees GBPUSD falling to 1.6300 by the end of Q1’14."
Who are we to believe? At present my bets are on the technical camp calling this correctly.
"We now sit just beneath the 1.6500-1.6520 handle that has capped moves higher on two occasions this year.
"Technical analysts would argue that a break and close above this level of resistance could be the start of a run towards 1.6747, the 2011 high. This is in contrast to the consensus view of Economists polled by Bloomberg which sees GBPUSD falling to 1.6300 by the end of Q1’14."
Who are we to believe? At present my bets are on the technical camp calling this correctly.
11:52: Citi forecasting more to come from GBP
A brief forecast note from Citigroup:
"Technically, GBP/USD may test higher to 1.6618, with support at 1.6260. GBP/NZD may test higher to 2.0313, with support at 1.9459."
"Technically, GBP/USD may test higher to 1.6618, with support at 1.6260. GBP/NZD may test higher to 2.0313, with support at 1.9459."
11:34: Why the Bank of England will be slow to act
BK Asset Management's Boris Schlossberg tells us markets should not get ahead of themselves over their expectations of a Bank of England rate cut:
"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."
"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."
11:07: Markets dominated by GBP strength
"The FX markets are dominated by GBP strength this morning, as the UK unemployment rate unexpectedly fell to 7.1% in November according to ILO unemployment report. Jobs data sent the GBP-complex higher across the board; GBPUSD hit 1.6552, EURGBP cleared support at 0.8220/25. In Turkey, the lira extends weakness after the CBT decision to keep the status quo in its January MPC meeting. In the precious metals side, the gold prices trend lower after failure to break above the trendline top. This afternoon, the focus will shift to BoC policy verdict and BoC Governor Poloz’s press conference. Expectations are dovish." - Ipek Ozkardeskaya at Swissquote Bank.
11:00: New rising trend for GBP/USD?
"Dip to the 1.6445 break held up this AM before GBP jumped quickly ahead; drive up to 1.6490 feasibly starts a new rising trend, though we'd need to see 1.65 hold pullbacks now to start to firm that call." - FX Market Alerts.
10:49: Prospects of a rate hike make sterling look attractive
Andy Scott at HiFX:
"The Bank of England’s minutes from its meeting this month made clear its stance that it is still in no hurry to increase interest rates despite the improving economy.
"In regards to its unemployment threshold of 7% as a review point for considering an interest rates rise, it said the MPC see “no immediate need” to raise interest rates if 7% unemployment threshold is reached in the near future. This may be one of the reasons that sterling didn’t manage larger gains on the back of such positive data. Clearly the BoE is going to have to adjust its forward guidance now to give the market an idea of when it may increase interest rates since we’re practically at the threshold now.
"The market is now pricing in the first rate hike in April 2015 following this morning’s data and expectations of a hike next year will continue to make sterling look attractive, particularly against the euro which could still see monetary policy eased due to very low inflation."
"The Bank of England’s minutes from its meeting this month made clear its stance that it is still in no hurry to increase interest rates despite the improving economy.
"In regards to its unemployment threshold of 7% as a review point for considering an interest rates rise, it said the MPC see “no immediate need” to raise interest rates if 7% unemployment threshold is reached in the near future. This may be one of the reasons that sterling didn’t manage larger gains on the back of such positive data. Clearly the BoE is going to have to adjust its forward guidance now to give the market an idea of when it may increase interest rates since we’re practically at the threshold now.
"The market is now pricing in the first rate hike in April 2015 following this morning’s data and expectations of a hike next year will continue to make sterling look attractive, particularly against the euro which could still see monetary policy eased due to very low inflation."
10:17: Sterling hits barrier vs EUR
"GBP/EUR hits a barrier at 1.2210 whilst cable settles at 1.6540" - Caxton FX.
10:05: The dilemma faced by the Bank of England
Gautam Batra, Managing Director and Investment Strategist at Signia Wealth, comments on UK employment figures and today’s MPC minutes:
“Today’s claimant count, unemployment rate and 3 month jobs data all point toward a greater resilience in the UK economy. However this presents a dilemma for the Bank of England. Their desire to keep interest rates low, despite unexpectedly stronger near term economic performance, exposes an increasing risk for investors.
"If interest rate expectations in the UK become untethered, short rates would rise in spite of BOE guidance, and longer dated gilts yields would also be pressured higher. These factors, together with a rise in Sterling, could threaten the nascent recovery underway."
“Today’s claimant count, unemployment rate and 3 month jobs data all point toward a greater resilience in the UK economy. However this presents a dilemma for the Bank of England. Their desire to keep interest rates low, despite unexpectedly stronger near term economic performance, exposes an increasing risk for investors.
"If interest rate expectations in the UK become untethered, short rates would rise in spite of BOE guidance, and longer dated gilts yields would also be pressured higher. These factors, together with a rise in Sterling, could threaten the nascent recovery underway."
10:04: Will employment rates now accelerate?
Various reactions to today's good employment figures.
John Salt, Website Director at totaljobs.com:
"Today’s figures are further proof of economic improvement. Employers should recognise this as a signal to invest in people and take advantage of the recent growth. Jobseekers should now be more confident of finding employment in 2014 as growth forecasts are revised upwards for this year. The government will look to capitalise on this positive data as they continue preparing the next Budget, which should include further incentives for businesses to take on staff."
John Salt, Website Director at totaljobs.com:
"Today’s figures are further proof of economic improvement. Employers should recognise this as a signal to invest in people and take advantage of the recent growth. Jobseekers should now be more confident of finding employment in 2014 as growth forecasts are revised upwards for this year. The government will look to capitalise on this positive data as they continue preparing the next Budget, which should include further incentives for businesses to take on staff."
09:44: Wages growth still lagging
Why will the Bank of England argue for keeping rates low for longer, even if the 7% unemployment threshold is hit? Because inflation is low and there is slack in the economy, this is tellingly portrayed through anaemic pay growth.
Wages grew +0.9% in 3M to Nov v 1.0% est. Up from 0.8% in 3M to Oct, this is still half the CPI rate.
Wages grew +0.9% in 3M to Nov v 1.0% est. Up from 0.8% in 3M to Oct, this is still half the CPI rate.
09:40: Bank of England fails to stem sterling
There was speculation that the Bank of England could try to talk down the GBP today. However, as Forex.com note:
"BOE - no mention that the Bank will lower economic threshold next month, this has send GBP/USD soaring above 1.6500, 1.6605 is key resistance."
"BOE - no mention that the Bank will lower economic threshold next month, this has send GBP/USD soaring above 1.6500, 1.6605 is key resistance."
09:36: Pound exchange rates shoot higher
Strong GBP gains being seen as markets react to today's unemployment numbers. Below is the reaction in pound to euro:
09:30: Shocker as unemployment in UK plummets
We thought those holding out for a fall to unemployment at 7.2% were being overoptimistic.
The reality? UK unemployment plummets to 7.1%. Bank of England under severe pressure over rates now.
Sterling shoots higher!
The reality? UK unemployment plummets to 7.1%. Bank of England under severe pressure over rates now.
Sterling shoots higher!
09:10: 20 minutes to go before today's big event
At the bottom of the hour things should start getting interesting for the British pound. Pareet Patel at Afex reminds us why:
"The UK releases its unemployment report this morning and we look for a further decline in unemployment from 7.4% in October.
"The UK economy has been growing strongly over the past year and unemployment is falling at the fastest pace in a decade. Bank of England releases minutes from the latest MPC meeting, which will be looked at closely for clues about what factors will determine the first hike once the unemployment rate has fallen below the threshold of 7%."
"The UK releases its unemployment report this morning and we look for a further decline in unemployment from 7.4% in October.
"The UK economy has been growing strongly over the past year and unemployment is falling at the fastest pace in a decade. Bank of England releases minutes from the latest MPC meeting, which will be looked at closely for clues about what factors will determine the first hike once the unemployment rate has fallen below the threshold of 7%."
08:00: Will Bank of England focus on Sterling's strength?
Lloyds Bank warn that the Bank of England could try to talk the British pound lower:
"GBP has remained firm in the run-up to today’s labour data and should the unemployment tick lower to 7.3% as expected, this may trigger a modest GBP positive reaction. This would also prompt increased focus on the more timely claimant count data and the MPC minutes which are both released at the same time.
"At last month's meeting, the Committee showed some concern over the strength of the GBP and the downward impact a continued appreciation would place on GDP growth. The focus will be on any comments on the strength of the sterling towards the end of last year, and the recent improvement in the labour market."
"GBP has remained firm in the run-up to today’s labour data and should the unemployment tick lower to 7.3% as expected, this may trigger a modest GBP positive reaction. This would also prompt increased focus on the more timely claimant count data and the MPC minutes which are both released at the same time.
"At last month's meeting, the Committee showed some concern over the strength of the GBP and the downward impact a continued appreciation would place on GDP growth. The focus will be on any comments on the strength of the sterling towards the end of last year, and the recent improvement in the labour market."
07:45: Analysts expecting good news for British pound (GBP)
Markets are pricing in a positive outcome from today's employment figures, thus a disappointment will likely have a more notable downward effect on GBP than would an on-target outcome.
The UK labour market statistics will be the main focus this morning. The consensus view is for another tick lower in the ILO unemployment rate to 7.3%. However looking at the Bloomberg survey, there are a number of forecasters going for a larger decline to 7.2%.
The UK labour market statistics will be the main focus this morning. The consensus view is for another tick lower in the ILO unemployment rate to 7.3%. However looking at the Bloomberg survey, there are a number of forecasters going for a larger decline to 7.2%.
07:10: UniCredit see GBP declining regardless of today's data
UniCredit are today forecasting a decline in the unemployment rate down to 7.2 pct. This will be GBP positive, but only in the short-run warns Vasileios Gkionakis at UniCredit Bank:
"The complication arises due to the simultaneous release of the minutes. The dovish tone that the BoE is likely to have adopted regarding the time horizon that rates will stay low alongside any reference to the risks that an appreciating sterling poses to growth should offset the positive impact from the lower unemployment rate.
"In fact, because central bank verbal intervention tends to have a meaningful negative effect on currencies (at least in the short term), we think that the net impact on GBP in the immediate aftermath will be negative with the currency breaking below 1.64 and testing the 1.6350 or even below.
"We also remain comfortable with our 1.59 forecast for the 1Q14 because 1. sterling has a negative beta to US 10Y yields which should rise further from current levels on the back of Fed's tapering and 2. too much optimism is already built into the price of GBP while the bar for actual data to beat consensus expectations has been raised significantly."
"The complication arises due to the simultaneous release of the minutes. The dovish tone that the BoE is likely to have adopted regarding the time horizon that rates will stay low alongside any reference to the risks that an appreciating sterling poses to growth should offset the positive impact from the lower unemployment rate.
"In fact, because central bank verbal intervention tends to have a meaningful negative effect on currencies (at least in the short term), we think that the net impact on GBP in the immediate aftermath will be negative with the currency breaking below 1.64 and testing the 1.6350 or even below.
"We also remain comfortable with our 1.59 forecast for the 1Q14 because 1. sterling has a negative beta to US 10Y yields which should rise further from current levels on the back of Fed's tapering and 2. too much optimism is already built into the price of GBP while the bar for actual data to beat consensus expectations has been raised significantly."
