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    UK labour market dynamics support GBP surge

    The UK economy continues to go from strength to strength at the start of this year. The economy created a whopping 103K jobs in the three months to December, more than double the rate expected, the number of people claiming benefits has fallen to just 2.5% of the working age population and wages are on  the rise. This is good news for the consumer, and also for Prime Minister David Cameron as we lead up to the May General Election.

    The details:

    • There are now 30.9 million people in work, 608,000 more than a year earlier.
    • The proportion of people aged 16 to 64 in work is now 73.2%, the highest level since 2004.
    • The unemployment rate dropped to 5.7% in December, from 5.8% the month prior, this is the lowest rate since 2008.
    • Wages were also higher, including bonuses wages rose to 2.1% in December from 1.7%. Excluding bonuses, wages fell slightly to 1.7% from 1.8%.

    Overall this is a solid report that will give the Bank of England faith that it is pursuing the correct path by not being too worried about the prospect of deflation. This report is pound positive even if there are a couple of points that are worth noting:

    1, The number of people who are economically inactive – people who are out of work and not seeking or available to work - is trending higher. It rose by 22,000 from July – September 2014, which is 6,000 more than a year earlier. This could be flattering the unemployment rate, and we will watch this data going forward to see if this trend continues.

    2, Wage data: bonuses tend to be paid at the start of the year, so a bounce in January wage data is to be expected. The fact that wages excluding bonuses actually fell, is slightly worrisome. We wouldn’t expect the BOE to boost its rhetoric about a rate hike without wages ex. Bonus moving back to 2% first.

    These points are worth keeping an eye on for the next couple of months, however they are not enough to disrupt the pound’s rally. This is still a pound positive development that could trigger the next leg higher for GBPUSD.

    The pound effect:

    • The labour market data has caused trade weighted sterling to jump to its highest level since September 2008. (See figure 1).
    • EURGBP is poised to make another 7-year low, and is very close to 0.7372 – the low from 12th Feb.
    • GBPUSD has jumped above its 50-day sma at 1.5325, and could make a stab at 1.5606 – the 100-day sma.

    The technical view: GBPUSD

    GBPUSD has made some significant technical breakthroughs to the upside in recent days. Even after struggling on Tuesday it managed to stay above 1.5317 –rising trend-line support, which is a further bullish development. This suggests to us that the bulls are in control, and  the next target on the upside could be a key resistance zone between 1.5606 – 100-day sma – and 1.5620 – the high from 31st Dec. In the short term, support stands at 1.5197.

    Takeaway:

    • UK labour market data continues to improve.
    • The wage component of the data rose to its highest level since mid-2013.
    • This report supports the BOE’s view to look through this period of weak CPI.
    • If you digged deep enough there were a couple of weak spots in the report, but these are not too troubling right now.
    • The pound has surged on the back of this data.
    • Trade-weighted GBPUSD has jumped to its highest level in 7 years, which could trigger another leg higher in GBPUSD.

    Figure 1:

    Source: FOREX.com

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