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UK Labour Market Weakens; Bank of England Minutes Hold No Surprises

UK Labour Market Weakens; Bank of England Minutes Hold No Surprises

2011-05-18 09:16:00
Jonathan Granby,
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More downbeat news for the UK as the April labour market report came in weaker all around. The claimant count rose another 12.4K, the fastest pace since January 2010, accompanied by a downward revision to March’s numbers and disappointing against forecasts of an unchanged reading. The jump pushed the unemployment rate up to 4.6% after being stuck at 4.5% since last October.

The weakness in the UK labour market is to be expected as the government slashes 330,000 public sector jobs as part of its austerity measures to tackle the budget deficit. The government is relying on private companies to create jobs to make up the difference but as growth remains weak, after contracting in Q4 2010, not enough jobs are being created inflating the ranks of the unemployed.

Also released this morning was the Bank of England minutes from their May meeting which showed an unchanged 6-3 vote for leaving interest rates at 0.5%, for the 27th month, and a steady 8-1 vote on the asset-purchase plan. This result was something of a surprise considering the intense pre-release chatter in the market that BoE Weale had changed his vote from hawkish to neutral.

In the text, the divisions between the hawks and the majority were ongoing as those wanting to raise rates saw little benefit in waiting. They were countered by the argument that inflation is still expected to ease in the medium-term. Mr. Dale and Mr. Weale see the case for immediate hikes as “finely balanced” which offers a hint that they may in fact become neutrals soon, they are both data dependent voters. The majority meanwhile maintained that a rate hike now could seriously affect consumer confidence and there remains little risk of inflation becoming entrenched. The minutes were littered with uncertainty about growth and inflation and provided little justification for a change to voting patters. On the whole, no real surprises in the minutes as the balance of risks looks little changed since April.

UK_Employment_body_gbp.png, UK Labour Market Weakens; Bank of England Minutes Hold No Surprises

Sterling traders didn’t really know what to do with the numbers as UK employment data came in worse than expected but BoE Weale remained a hawk. Choppy price action has ensued in the aftermath of the release as players come to grip with the news and leaf through the Bank of England minutes. As we mentioned yesterday after the UK inflation release we favour Gbp/Usd lower in the near term as weak growth prospects in the UK and a resurgent USD weigh heavily on the pair. The series of higher lows posted in the last few days needs to be broken to confirm and a breach of Friday’s 1.6145 low and the nearby 100-day SMA at 1.6140 will accelerate declines toward the psychologically important 1.6000.

Written by Jonathan Granby, DailyFX Research Team

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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