UK jobs reports, strong earnings fire up sterling

<p>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 […]</p>

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.

UK real pay Feb 18

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.