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Forex: UK unemployment numbers reverse the bearish sterling trade – more to come?


Sterling was up sharply against the USD as British unemployment fell. The big question for the Bank of England remains inflation, however. Analysts were pleased with the fact that the UK is moving seemingly painlessly out of furlough with huge numbers of vacancies available.

Fears that a big chunk of furloughed staff would lose their positions led to the Bank of England holding off an interest rate rise at the last meeting but the jobs queues are getting shorter, as the big fight for staff continues, with the unemployment rate coming in at 4.3%, a notch lower than forecast.

Is the Bank of England worried about inflation?

The governor of the Bank of England Andrew Bailey says he’s uneasy about rising inflation and the jobs figures are another indicator that there could be a fresh sugar rush of higher wages. Already starting salaries this autumn are at their highest rate in 24 years but Bailey still appears steadfast in this view that sweeteners for staff will be temporary and that we won’t be returning to the wage spiral of the 1970s.

But the layers are building up for a sustained increase in prices in the medium term.

“The supply chain crisis has already spread across the globe, pushing up costs for companies and shows little sign of easing just yet,” noted Susannah Streeter, Senior Markets Analyst with Hargreaves Lansdown. “The pandemic bounce back has buttered up demand for goods, and now potential has grown for higher wages to congeal. The official Labour Force Survey won’t be released until the 16th of December but if the jam sandwich of sticky prices shows little sign of easing, it looks increasingly likely the Bank will raise rates at its meeting two days later.”

GBP rose from 1.3413 early this morning to hit 1.3466 at the time of writing. Sterling was down from about 1.3561 a week ago.

Is the Bank going to raise interest rates next month?

“If a strong jobs report was what the Bank of England was looking for before raising interest rates, it has officially received the greenlight for December,” said Mike Owens, a sales trader with Saxo Markets. “Sterling reacted positively to the news with all eyes now firmly fixed on the inflation report tomorrow.”

Sterling had been trading at its lowest levels against the dollar in 10 months. It has failed to react to expectations of rate hikes from the Bank of England. Citibank analyst have been claiming that GBPUSD would drop to 1.30. “We remain bearish cable as it fails to respond to the upside in increased MPC pricing and over the medium term envisage a much weaker GPB, targeting [less than] 1.30 over the next 3-6 months,” the bank said.

What to look out for from GBPUSD

From an economic picture, the prospects for GBP seem to be improving rapidly, setting up the potential for some bull market runs for the pound as we move into Christmas. There is an increasing expectation that the Bank of England will be forced to raise rates next month.

The elephant in the room is political risk – behind the scenes the UK is still struggling to find the common ground it needs with the EU. If the UK government triggers Article 16 of its treaty then traders will need to be braced for some high volatility in GBPUSD and GBPEUR. Keep an eye on Westminster and Brussels.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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