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Forex News – Big drop in UK unemployment rate sparks rally in sterling
January 22, 2014 1:37 pmVideo
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Having received a significant boost from the December retail sales report last Friday, the pound benefitted from a big drop in UK unemployment today.
Specifically, the ILO definition of the unemployment rate fell to 7.1% in the three months to November from 7.4% the previous period. It was the lowest unemployment rate since the first quarter of 2009. The unemployment rate was also well below economists’ forecasts of 7.3%.
The new data showed that unemployment was within a whisker of the Bank of England’s 7% threshold for raising interest rates. In the minutes of the latest monetary policy committee (MPC) meeting released at the same time as the unemployment data, the committee said they would not raise interest rates too quickly and that unemployment could cross the 7% threshold without causing interest rates to automatically rise. In other words, as the Bank of England Governor has stressed, the 7% unemployment level will not act as a trigger.
However, short sterling futures are now expecting a quarter-point hike by December of 2014 and an additional quarter-point rise in interest rates during the first quarter of 2015, as the Bank of England could be forced to act this year if the economic outlook continues to improve at this pace.
A very encouraging aspect of the data was that the labor force in the UK grew to over 30 million workers – a new record for the country. The participation rate for the 16-64 age group increased to 72.1% during September to November compared to 71.7% from June to August. The only drawback of the expanding labor market is that productivity growth is lagging.
Aside from the surprising drop in the unemployment rate, other aspects of the employment report were not as positive. The claimant count of registered unemployed fell by a smaller-than-expected 24 thousand in December versus a drop of 34.3 thousand in November. Economists were expecting a reduction of 35 thousand in December’s claimant count.
In addition, the year-on-year change in average weekly earnings was 0.9% versus forecasts of 1.0% growth. This shows that wages are having trouble to keep up with inflation, which could be slightly negative for spending (there are other factors to consider as well of course).
The pound gained an entire cent against the dollar following the report, reaching 1.6560 compared to around 1.6460 before the announcement. The January 2nd high of 1.6590 was within sights. The euro dropped from 0.8230 to around 0.8185 – below the psychological 0.8200 level. This was a new 1-year low.
To sum up, strong economic numbers out of the UK led to a higher pound as the UK now looks almost certain to become the first G7 economy that will raise interest rates in the aftermath of the 2008 financial crisis.
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