British Pound (GBP) Set for a Period of Consolidation

The British pound (GBP) is being sold across the board on Wednesday morning as the UK unemployment rate creeps back to 7.2%.

The pound sterling weakened on Wednesday after the release of employment data for December that showed an increase in unemployment to 7.2%, the first increase since the beginning of 2013. Analyst Piet Lammens at KBC Markets says he maintains a Long-Term sterling positive bias, but in the day-to-day perspective, the sterling correction might have some further to go. "We remain also a bit cautious on sterling ahead of tomorrow’s retail sales as we think that a rather poor figure is possible."

A look at the latest pound exchange rates shows:

• The pound euro exchange rate is trading 0.09 pct lower at 1.2115.
• The pound dollar exchange rate is trading 0.18 pct lower at 1.6654.
• The pound Australian dollar exchange rate is 0.24 pct down at 1.8439.
• The pound New Zealand dollar exchange rate is 0.4 pct lower at 2.0008.
• The pound Canadian dollar rate is 0.22 pct down at 1.8231.

(Note: All FX quotes here refer to the wholesale spot market. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.)

Traders pressed the sell button on the pound sterling exchange rate complex as market expectations were for the rate to remain at 7.1%, the lowest level since 2009.

That said, any overly aggressive selling of GBP at this stage would be surprising as the labour market figures were, apart from the unemployment rate, positive.

The claimant count for January fell by 27,000, more than expected.

Importantly, there are also indications that slack in the economy is easing, as confirmed by the pay increases awarded.

Average Earnings excluding Bonus (3Mo/Yr) (Dec) were forecast at 0.9% but came in at 1.0%. Average Earnings including Bonus (3Mo/Yr) (Dec) were forecast at 1.0% and came in at 1.1%.

The Bank of England told markets last week that it wants to see a broader improvement in the economy, and with the unemployment rate so close to the 7% threshold signs of an improvement in wages suggest that the recovery is firm.

The minutes from the Bank of England were released at the same time but there was nothing in them that we didn’t already know from last week’s quarterly inflation report.

“Sterling fell to session lows against the dollar and the euro following the release, but losses were limited due to expectations that overall the economy is still on the recovery path that should lead to the BoE being one of the first in the G8 countries to increase interest rates, spurring demand for the pound," says Andy Scott at HiFX.

Scott goes on to say:

"The picture of the U.K. economy we see is one of strengthening domestic demand and confidence, which along with an improving global outlook, is leading to increasing employment.

"There was always a chance of a lull or slight reversal given the large fall in the unemployment rate last year but we continue to expect the rate to decline through 2014 and for sterling look strong. The Bank of England seems less concerned by sterling’s value than in previous years where they sought to weaken it to boost exports and that in itself tells us that the economy is stronger now."