UK Labour Market Surprise Saw GBP/USD Strength

UK labour data beat estimates handily sending cable to session highs as employment situation appears to improving raising hopes amongst investors of better growth in 2013. UK claimant count printed at -3K versus estimates of 7K while the claimant count rate remained at 4.8% as expected. The unemployment rate also remained the same at 7.8% but the ILO jobless numbers fell by 82K for the three months through October. The one sour note in the report was that average earnings rose only 1.8% versus 1.9% forecast as wage pressures continue to weigh on UK workers. Still, the overall labour report was certainly an upside surprise given the lacklustre rate of recent economic data that suggested UK may dip into a triple dip recession in Q4 of this year. Private sector employment has now reached its highest levels since 1999. The labour data suggest that aggregate demand in UK may be better than the market consensus as the anticipated post-Olympics lay-offs have not materialized. If labour data numbers continue to improve for the next several months, economic activity is sure to follow and the prospect of yet another contraction will be greatly diminished. Cable responded well to the news rising to session highs of 1.6130, but the pair is likely to stall at these levels ahead of major triple top resistance at 1.6150

While GBP/USD was firm yesterday it underperformed EUR/USD, and this seems likely to continue to be the case on any upmove. Conversely, we see more downside for GBP/USD than EUR/GBP on EUR/USD downmoves, with the recent lows in the 0.8030 area likely to prove tough to break. Today’s CBI orders numbers are unlikely to significantly influence sterling, with potentially more interest in Osborne’s testimony on the Autumn Statement. 1.5950 is the main support area on the downside, but initially the 1.62 resistance area may be more in focus.

There’s no Eurozone data of any note today, but the ECB monthly report may serve as a reminder of the negative assessment of the Eurozone economy provided by the ECB staff forecasts last week. ECB chief economist Peter Praet is speaking later, and his comments earlier in the week suggest he may play down the scope for a rate cut. But EUR/USD looks more likely to be driven by the USD than the EUR, with the USD still soft after the Fed decision, and the recent highs at 1.3127, 1.3140 and 1.3172 are consequently under pressure. A break of one may well mean a break of them all, but we would still not look for any EUR strength resulting from topside stops being done to extend far without some better news on the European economy.

The USD’s weakness faded after the Fed decision, but whether there is USD upside from here will depend as much on whether the market starts to take the possibility of the fiscal cliff more seriously as any assessment of the likely impact of US QE or the significance of the change in the Fed’s forward guidance. Initial support for the USD index is at the December low of 79.58. If that holds we still see USD index upside as being restricted by the 80.75-81.00 area, but a test of that region remains a strong possibility. Today’s US retail sales data are likely to be of little interest, as the picture for US consumption has been very stable now for a long time.

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