UK jobs reports strong earnings fire up sterling

The positives of the UK jobs figures are broad-based as the unemployment rate –measured by the ILO– dropped for the 3rd straight month to reaching 5.7%–its lowest since August 2008. Earnings rose by 2.1% y/y in the 3 months ending in December, reaching their highest level since Q2 2013, while earnings excluding bonuses slipped to 1.7% from 1.9%, meaning that pay growth ex-bonuses after inflation grew at the highest level in nearly 6 years. Finally, jobless count fell by 38,600, well above expectations of a 25,000 decline and the largest drop since October 2013.

Sterling and gilt yields resume their rally, boosted by the release of the BoE’s MPC minutes, which revealed that inflation could rise sharply once the oil effects have abated, while 2 members indicated a rate hike may still be needed in 2015.

These figures, reinforce our view that sterling is the best alternative to the US dollar, as it is backed by one of two major central banks expected to raise rates this year in a universe of zero-bound interest rates. Yet, even if the BoE does refrain from tightening this year, sterling’s increased positioning as a safehaven from Eurozone uncertainty is being especially highlighted by the Swiss National Bank’s plunge towards negative interest rates.

Finally, we expect UK inflation to begin stabilizing before its US counterpart, mainly due to diverging currency effects as the pound fell 10% against the US dollar from last summer’s peak. With the Bank of England already preparing markets for inflation to fall below zero temporarily, FX traders are already looking beyond this point. In contrast, the Fed continues to describe soft inflation figures as “transitory”, without preparing markets for temporary downside surprises.

GBPUSD’s road to 1.5600 appears bolstered by the above dynamics, especially as the Feb 3rd trendline support remained intact after yesterday’s pullback. Dovish hints in this evening’s release of the Fed minutes with respect to international developments will send the pair to 1.5480, while any pullbacks as seen drawing fresh bids. GBPAUD longs and EURGBP shorts also remain intact.